STI is about to move decisively

In my last posting, i mentioned 3180 as the level that satisfies the condition of a buy on the STI. Indeed, the index has stayed above this level throughout the week, with relatively high volume but the movement has been relatively cautious. I expected a clear breakout once the level was met, as the previous resistance was cleared. Instead, the trading on last Wednesday, Thursday and Friday showed a pause at 3195. Last week's cluster forms a flag which in typical conditions represents a bullish continuation, meaning that a usual upside outbreak is expected. Since a strong upside is the conventional wisdom, i would be cautious if the index trades below 3177 starting from Monday, as that points towards downside. The momentum has slowed and indicators are screaming 'high risk' for long trades, as they have formed the downward cross from overbought region. For traders holding a long position, i suggest that the small profits be taken if the index trades near 3195 and bounces off.

Fundamentally, the US debt issue could trigger off a round of selling initially should the bonds get downgraded, as the market is likely to equate that with a weak economy. The S&P 500 ended Friday with a close below 1296, which is definitely bearish. I expect the US market to slide and that is likely to washout the fire on the STI, hence my bearish bias.