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Sunday, May 31, 2009

Double Top Danger

Double top for DJIA? Odds are the DJIA completed a bearish “double top” last
week after testing its early May high. The index reached 8,591pts before correcting
over the past few days. It is now holding just above its key support trend line at
8,180pts. A break below this level would be bad news and would probably confirm
the end of the uptrend that started in early Mar. This should be followed by a
deeper correction, possibly towards the 7,500-7,800 levels.
• Bullish only if 8,600 breached. Our alternative wave count, which calls for a more
bullish outlook, would be confirmed only if the 8,600 resistance were overcome.
But looking at the negative divergence in the technical indicators, we rate this as a
low-probability scenario.
• Banking stocks to lead? We believe US banking stocks should provide some
indication of the direction of the US stock market over the next few weeks. The US
KBW Bank Index has been trading in an uptrend channel since early Mar. But last
Friday, it broke the support trend line at 36pts, which is a negative sign.
Furthermore, given the negative divergence in the daily technical indicators, the
odds favour more downside for the KBW Bank Index in the immediate term.
• Upside capped for Asian markets after new high. The MSCI Asia ex-Japan
Index (MAxJ) scaled a new high of 380pts for May, above the 371 resistance level.
But the near-term upside could be capped as the daily technical indicators are
showing strong negative divergence signals. The key support trend lines are now
at 363 and 355, which, if broken, would be very negative and likely confirmation of
the end of the uptrend that began in early Mar.
• Double top also seen in regional equity indices. Singapore’s STI, Hong Kong’s
Hang Seng and Indonesia’s Jakarta Composite Index were also showing bearish
“double tops” last week and pulled back sharply by the end of the week. In the
immediate term, these indices are likely to challenge the double top. Our concern
is that the rally may not be sustainable if trading volumes do not pick up soon. A
break below the support levels could lead to more consolidation in the near term.

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