STI Could Breakout (if CNH Allows)

Close-up of market chart
Matt Simpson financial analyst
By :  ,  Market Analyst
The Nikkei and Hang CSI300 have outperformed the STO over the past 30 days

We can see on the weekly chart that the STI is within a 5-wave impulsive move which began at the March 2020 low. Wave 3 stalled at a 127.2% Fibonacci ratio and Feb 2020 high, and may have since completed a 3-wave correction. We suspect the correction is complete as it held above 3,000 (significant round number), the May low and 200/50 week eMA’s.

 

The STI appears to be in wave 5 of an impulsive move on the weekly chart

Furthermore, as bullish momentum has now realigned with wave-3, we’re now anticipating an eventual break above 3224 on its way to our wave-5 target around 3400. The target coincides with the April 2019 high and 38.2% expansion. However, there may be reason to suspect it may not break higher immediately and instead pull back from current levels beforehand.

 

Correlations matter

he 20 and 60-day rolling correlations between STI and CNH have increased over recent weeks to show a stronger relationship between the two markets

If we look at the relationship between the STI and USD/CNH, they share an inverted correlation. It is not perfect, but good enough to see a relationship exists over the longer-term. CNH is offshore Yuan, and if it increases in strength (USD/CNH moves lower) then it can be supportive of Asian markets such as the STI as CNH flows into them. However, by using a correlation indicator of the two markets we also note that the rolling 1-month (20 day) and 3-month (60-day) correlations are increasing which show the relationship has become increasingly stronger over recent weeks.

It is therefore worth noting that CNH is approaching a key level of support at 6.35 and, if it holds (at least initially), it suggests that STI may stall or retrace from the nearby resistance zone. 

 

If USD/CNH bounces, STI could retrace

The daily chart has stalled at a key zone of resistance

The daily chart shows its rally has stalled at the lower bound of a resistance zone. A spinning top Doji and 2-bar reversal (Dark Cloud cover) suggest near-term exhaustion on the daily chart, and a move lower could be a higher probability event should USD/CNH bounce from support.

  • A break below 3185 confirms a minor correction is underway against the daily trend.
  • However, as the daily trend remains bullish above 3088 it leaves quite a bit of wriggle room for a retracement, should USD/CNH bounce considerably from current levels.
  • Overall, we anticipate STI to eventually break above 3244 as part of its wave-5 move.

 

 

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