Wednesday, January 27, 2016

How Low Can STI Go ?

I'm not going to pinpoint exactly where STI will bottom for the current crisis but rather narrow down all the possibilities so that it will be easier to strategize.

In order to do that will have to rely on Technical Analysis (TA).  Normally, as a long term fundamental investor using TA doesn't make any sense but when it comes to the big trend, TA cannot be totally ignored.  This is so because I could adjust my portfolio to cushion for the big crash (detecting possible peak of the bull market) and conduct appropriate financial planning for bargain hunting in depressed level.


Above is the STI chart from the peak in April 2015 till 26th Jan 2016.  Elliott Wave was used as can be seen from the chart.  The big fall will consist of 3 waves (A, B, C).  Wave A already completed and so as Wave B and we are currently in Wave C, the last leg of the down cycle.  Based on that, the possible termination point for Wave C could be 2,330 or 1,865 and shall explain later how these 2 figures come about.

Firstly, to confirm we are actually in Wave C, we look at the characteristics (wikipedia) of Wave A, B and C.

Wave A: Corrections are typically harder to identify than impulse moves.  In wave A of a bear market, the fundamental new is usually still positive.  Most analysts see the drop as a correction in a still-active bull market.  Some technical indicators that accompany wave A include increased volume, rising implied volatility in the options markets and possibly a turn higher in open interest in related future markets.

Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market.  Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern.  The volume during wave B should be lower than in wave A.  By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.

Wave C: Prices move impulsively lower in five waves.  Volume picks up, and by the third leg of the wave C, almost everyone realizes that a bear market is firmly entrenched.  Wave C is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.

We could not be in Wave A as fundamental new is no longer positive (looking at the concern on China economy growth and the impact of low oil price on the O&G sector).  We also not in Wave B stage as we are not reversing to higher prices.  At this stage I believe no one will deny we are not in bear market and that exactly fit in with the characteristic of Wave C.

So when will Wave C end ?  Each wave can have sub waves in it as can be seen from the chart.  Wave A and Wave C can have sub waves of i, ii, iii, iv and v and after the sub wave completed its cycle than the wave can be considered ended.  Wave A has completed sub wave i, ii, iii, iv and v and Wave B also completed its sub wave of a, b, c.  Wave C currently only completed sub wave i, ii and iii still ongoing.  We have to wait for sub wave iv and v to complete then we can say the final leg is done (market bottom).

From characteristic of Wave C, it is at least as large as Wave A (a drop of about 750 points) and if we take that magnitude, Wave C should end at around 2,330 (peak of Wave B 3,080 - 750).  If we take the extended case of 1.618 times of Wave A, Wave C could end at about 1,865 (3,080 - 1.618*750).  This is how the 2 figures came from.

Next, we look at what happened during the 2008 GFC


Similarly, the big crash completed the Wave A, B and C giving us a bottom at 1,456.  The magnitude of Wave C was 1.654 times that of Wave A, conforming to the characteristic of Wave C.  The bankruptcy of Lehman Brothers happened in September 2008 which appeared to be during the sub wave v of Wave C, thereby extending the magnitude to 1.654 times of Wave A.  In 2008 GFC, Wave A took 5 months to complete, Wave B took 2 months and Wave C took 10 months.  Now for this crisis, Wave A also took 5 months to complete (Apr 2015 to Sep 2015), Wave B took 1 month (Sep 2015 - Oct 2015) and Wave C though still in progress is already 3 months old (Oct 2015 - Jan 2016).  Given the above 2 possible targets (2,330 and 1,865) and with sub wave iii ongoing, iv and v yet to run its course, we could easily match the time frame of 2008 GFC Wave C.

STI 2,330
This is the optimistic case and for this to happen there should be no full blown global recession for this crisis (Singapore economy could yet enter technical or even real recession but will be a shallow one).  This is possible given that one of the main cause for this crisis is crashing of oil price.  Oil price is already at the extreme pessimistic level with some analysts calling for US$20 or even US$10, pretty much all the pessimistic news and expectations are in.  A possible time frame to hit 2,330 could be 5 months (minimum) from the start of Wave C.  Since we are already 3 months into Wave C and just 200+ points away from present level with just sub wave iii, iv and v to be complete, the time frame to watch out for will be March/April 2016.  5 months period is taken due to the fact that magnitude of Wave C is equal to that of Wave A and hence the period should be similar.

STI 1,865
This is the worst case and for this to happen there should be a full blown global recession for this crisis.  This is possible should we have a triggering event like bankruptcy of Lehman Brothers in 2008.  Some possibilities would be bankruptcy of a big O&G company, China economy in for a hard landing and US economy back into recession just to name a few.  Should we take the time frame for 2008 Wave C as a reference, we will have 7 more months to go taking us to August/September 2016 to the bottom.  With sub wave iii, iv and v to complete, this 7 months period is more than enough to send STI to 1,865, a region very close to the bottom of 2009 bottom.

So good news is we are in the final leg of the down but the bad news is we are not done yet.  The 2 possible bottoms (not the exact absolute) should help to narrow down strategies in order to take advantage of this current crisis.

Are we going to see what was described above happened ? Nobody know but it is always better to keep all options open, be mentally prepared and having strategy for it.

2 comments:

  1. Hi

    I am a newbie investor. Should I wait till 3rd quarter of 2016 before entering the market? Or should I enter in tranches? Thank You.

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  2. hi,

    my intention of this post is not to predict when the exact bottom but rather narrow down the possibilities of that happening so that i could plan for it. each individual will have different risk (yours will be different from mine) so what's my plan not necessary suitable for you. you have to examine how much capital you have and how much risk you can stomach, at what price level you feel comfortable to buy. also not all stocks behave the same as STI, some might bottom first, some later than STI. if you thinking of doing tranches by tranches you have to think how many tranches can you go before you run out of capital. if you decide to wait till Q3 and if Q3 still not bottom what's your next plan ?

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