Selling pressure continued through the week of July 3-7 unabated. However, unlike the last week of June which were dotted by black candles with shaven tops and bottoms, and a surge in volume, the sessions on July 7 ended with a pattern resembling a dragonfly. This is a small body near the top of a long shadow.
Dragonfly patterns may temporarily stymie a decline if they look strong. At present, volume accompanying the black candles lower remains relatively high.
Any reprieve from the selling pressure is likely to be a temporary reaction to short term oversold lows of oscillators. Quarterly momentum is falling; directional movement indicators are unlikely to give hope. ADX is rising and the DIs are now negatively placed.
The Straits Times Index lost 66 points week-on-week to end at 3,139, and below the June low of 3,159. The break below 3,159 provides a measuring objective of 3,090. The index may head towards this level first before finding support, forming a minor positive divergence and gathering the impetus for a rebound.
Just as equity markets are weak - the Hang Seng Index may have further to fall than the STI - yields on 10-year US treasuries are at 4.0456%, the highest level since the start of the year. Unfortunately, the 50-, 100- and 200-day moving averages have bunched together and are moving apart as they rise, an indication of higher levels for the 10-year yield.
Rising risk-free rates are usually not positive for equity markets as they automatically raise the weighted average cost of capital, causing prices to fall.
See also: STI’s upside from breakout remains valid as risk-free rates fade, but stay watchful for FOMC
Against a backdrop of rising risk-free rates, equity markets and their benchmark indices, including the STI are likely to remain pressured, debunking the chances of a summer rally.
