Directional movement comprises of ADX which attempts to identify whether the market is trending or moving sideways, and directional indicators or DIs. ADX does not identify an uptrend or downtrend. It merely indicates whether the market is trending or ranging. The trend direction is based on the positioning of the DIs. The lower the ADX level, the more likely a sideways trend has developed.
As at July 24, ADX stood at 12, up a point week-on-week, from 11, both of which are low levels, and the up-tick is a minor move. The DIs are now negatively placed, and the decline by the Straits Times Index on July 24 to 2,579, down points 39 points week-on-week, was accompanied by an increase in volume. If ADX continues to rise in the week of July 27–30, further declines are likely.
While one swallow does not a summer make, the movement is disturbing and points to some selling pressure. In addition, short term stochastics is falling, the 21-day RSI is retreating from its equilibrium line, and quarterly momentum, which had been resilient till the past few sessions, has dipped below its equilibrium line and appears poised for a breakdown.
The STI, meanwhile, has not been able to hold above the confluence of the 50- and 100-day moving averages, at 2,626 and 2,606 respectively. If the index is unable to regain these two moving averages, it would end July below a support, an indication of a weak performance for the first two weeks of August.
Immediate support for the STI is at 2,574. When this is breached, the next support appears at 2,499. The index made a low of 2,233 on Mar 23, which could turn out to be the low of the current cycle. In order to negate the weak outlook, the STI needs to regain its 50-day moving average before July 30 and this is looking increasingly difficult.
