The old Wall Street adage “sell in May and go away” may well work for the local market, which has been in a comatose state for the past two weeks. Our moribund Straits Times Index remains in its sideways trend, meandering between 3,021 and 2,906.

An interesting chart formation has appeared on the Shanghai Composite Index in the form of a reverse head-and-shoulders base, which implies a reversal of the downtrend. Whether there can be a successful resolution to the base remains to be seen. Encouragingly, both the Dow Jones Industrial Average and Standard & Poor’s 500 indices had such formations back in 2010 and that has resulted in their uptrends which are still in force two years later.

Fundamentally though, Markus Rosgen, strategist at Citi Research acknowledges, in an April 23 report, that China is cheap but that is not enough for an overweight. “We note that China still scores significantly worse than the region on earnings revisions” Rosgen writes. “The other factor is economic surprises. While these are hard to find globally at present, Chinese data excels at disappointing.”

On the growth front, Rosgen wonders whether China’s quarterly growth bottomed in 1Q2012, or whether it will trough in 2Q2012 or 3Q2012. “In our view, it’s unlikely in 1Q2012 as the policy easing is not enough to halt the downturn, and not in 3Q12 because uncertainties associated with the sub-8% growth right ahead of the leadership reshuffle in October are politically intolerable,” he notes.

Would political uncertainty and a black swan event, coupled with a chart base formation, herald a bottom in the Chinese stock market? These could. Markets usually bottom when the news is negative and peak when news is positive.

VIX EASES
The Volatility Index (16.8) fell sharply in the past two sessions, and is now below its moving average at 17.2. Its ADX continues to fall, and the DIs are neutral, suggesting that any recovery is unlikely next week. That takes the pressure off the equity markets, because a falling VIX indicates a better stock market. Support has been established at 14 — so the downside is limited. The level to watch is now 19.6, a resistance.

The Dow (13,090) remains above its 50-day moving average currently at 13,020, a level it regained a week ago. Resistance has been established at 13,250, at the top of the March-April trading range. ADX continues to ease, and remains at a low level. With DIs neutral, this means that the index is likely to trade sideways rather than attempt a breakout in either direction. The support area is around 12,950- 13,000. During this consolidation phase, the uptrend is likely to remain intact.

The S&P 500 (1,390) has been able to trade above its 50-day moving average, currently at 1,381. ADX is falling and that will keep the index in its consolidation phase. Support is at 1,350, and resistance is at 1,410. There is an eventual target of 1,440 and this and the uptrend remain valid.

STI (2,981)
Long term: down; medium term: down; short term: down

SHORT TERM
RSI (Chart B) continues to trend lower and has not reached the oversold levels yet.
ADX (Chart B) is falling and at a low level and the DIs remain neutral.
Stochastics (Chart B) has turned down.

MEDIUM TERM
Quarterly momentum (Chart A) is falling after a minor negative divergence with index.

LONG TERM
Annual momentum (Chart C) has resumed its decline and the smoothed momentum continues to decline.
24-month ROC (Chart C) is turning down and the smoothed indicator continues to fall.
(See Charts A, B and C)

The very low level of ADX, currently at 11, suggests that the STI is likely to meander along within a narrow sideways range. The DIs are neutral. The STI has once again fallen below its 50- day moving average, and may well continue to trade around it till the trend issue is resolved.

Quarterly momentum continues to fall following a break below its own moving average. The 21-day RSI is also declining following a negative divergence with the index. 5-day stochastics has turned down from an overbought level.

The long-term indicators haven’t changed. Raw annual momentum is starting to retreat and the smoothed annual momentum continues to decline. On the other hand, the raw 104- week RoC is turning down, and the smoothed indicator continues to fall.

The long-term 200-day moving average continues to ease — another 3 points — and is now at 2,860. Resistance has been established at 3,021 and support is at 2,906, the neckline of a possible double top.

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