In the previous issue of Shares Investment (Singapore), I wrote that “In the coming weeks, we could see the Dow Jones Industrial Average (DJIA) retest the 13,000 level while the Straits Times Index (STI) will try to reclaim 3,150.”Nevertheless, I also warned that “these technical levels are hard to breach unless something really good comes up.”The STI “outperformed” my expectations by hitting a high of 3,181.92 before retreating below 3,100 on 9 March, which conforms to my belief that 3,150 is indeed a “tough nut to crack”. At the other end of the world in US, the DJIA had once again failed to clear the 12,800 resistance and, thus, did not even get anywhere near 13,000.

Despite the two indices not living up to expectations, we should all be content with the fact that global markets held up well in spite of bad news from the US economic front. At the same time, Fed Chairman Ben Bernanke had finally admitted that the US economy “could already be in a recession”.

Last issue, I mentioned that the US government and the Fed should admit that the US economy is already in a recession, as it would serve a notice to confused investors that the situation is already in dire straits and nothing could be worse than a recession.The resilience shown by the US market in the face of bad news has proven that US investors are now “immune” to bad news after the US officials have admitted to a recession.

In the face of immunity to bad news and lack of fresh catalysts to guide markets higher, we are now locked in a tight trading range.

DOW JONES INDUSTRIAL AVERAGE
Since the low of 11,634.80 reached on 22 January, the DJIA has been locked in a trading range of 11,634.80 to 12,767.70 set on 1 February. Although a 1,000-point range is by no means a narrow range, it certainly does not help that the bellwether has thrice failed to clear 12,800.

Apart from 1 February, the DJIA tried a second time to hurdle past 12,800 but could only trade as high as 12,756.60 on 22 February. The failure to clear 12,800 for a second time spooked technical analysts into selling the DJIA, which then tried to retest the low of 11,634.80.

The third attempt, which occurred on 7 April, reached a high of 12,733.70 and had once again failed to clear 12,800. This time, however, the DJIA held onto the gains well and did not capitulate like the previous two occasions. This could be a sign that the DJIA is trying to consolidate before trying to cross 12,800.

At the time of writing this article, the DJIA has fallen below 12,500, which could open up more downside to 12,350.

The near-term, meaning a few days to a week, should see the DJIA consolidate further before challenging the 12,800-resistance. The medium-term picture, which could last for a few weeks, looks a lot stronger than it was before although we need the DJIA to clear 12,800 before we can finally confirm more upside.

STRAITS TIMES INDEX
Mirroring the performance of the DJIA, the STI, too, is locked in a trading range from 2,746 to 3,181.92.

Twice it failed to clear 3,150 and retreated to the support at 2,746. The third attempt took the STI to a high of 3,181.92 but soon back-tracked to 3,085.27 on 9 April, which opens up the way for more downside.

The downward retracement is likely to cover the gap support at 3,046, followed by the next gap support at 2,928. This is the likely scenario for the near-term should the US market show signs of weakness.

Like the DJIA, the STI displays strength for the medium-term, with relative strength index and stochastic indicators showing positive divergence. However, a bullish trend can only surface when the STI goes above 3,150 and 3,200.

CONCLUSION
Despite some short-term weaknesses, the medium-term trend looks good for both the DJIA and STI - supported by resilience shown by the markets these days.

As said on numerous occasions, we are still waiting for the effect of the rate cuts to be felt even though there have been no signs of the effect. Nevertheless, the positive trading sentiment should help support the market unless a fresh wave of unknown bad news surfaces.

There will be another round of rate cut at the end of this month and should also help to support the market. However, we should open our eyes to the earnings report for the first quarter. Results are likely to be bad and this could be the dampener that we all hate.

Disclaimer: Opinions expressed in this article are solely those of the author and do not represent the opinions of this publication and/or the opinions of the organisation he represents.

Straits Times Index locked in a tight trading range