SET Index Could Head South if Bearish Divergence Turns into a Breakdown

Witawat (Ed) Wijaranakula, Ph.D.
Fri Feb 10, 2017

Related Ticker: iShares MSCI Thailand Capped ETF (NYSEARCA:THD)

The SET index gained 0.15% for the week, to close on Friday at 1,585.24, despite that big cap energy stocks, including PTT PCL (SET:PTT) and PTT Exploration and Production PCL (SET:PTTEP), were down 3.41% and 4.35%, respectively. The big drag in the SET50 continued to be KCE Electronics PCL (SET:KCE) which tumbled 6.05% for the week, as the stock may be heading to retest the 100 and 90 baht levels. Shares of Airports of Thailand PCL (SET:AOT) sold off on Thursday, down as much as 4.17%, after the company made a 10-to-1 stock split. Investors might have rushed to the exits if they didnít know why the AOT price per share dropped 90%. 

From a technical viewpoint, a bearish divergence, meaning the SET index recorded higher highs while the MACD line formed a lower highs pattern, could turn into a breakdown, similar to that seen in August, if the index canít break out of the trading range. Investors may want be very cautious about buying on the dip, as equity prices could move even lower if the index breaks down.

The USD/THB exchange rate was up 0.17% for the week, to close on Friday at 35.08 baht per dollar. The U.S. Dollar index (DXY), a measure of the U.S. dollar value relative to a basket of foreign currencies, closed at 100.79, up 0.95% for the week, after 4 Ĺ weeks of being sold-off since the beginning of the year. The spot gold price surged another 1.24% for the week, to close at U.S. $1,235.90 per ounce on Friday, while the Japanese yen was down 0.52% against the U.S. dollar. Traders might have covered their yen long positions ahead of the meeting between Japanese Prime Minister Shinzo Abe and U.S. President Donald Trump in Washington D.C. on Friday.

The yield of Thailand 10-year government bonds lost 1.63% for the week, to close at 2.715% on Friday. The yield spread between the Thailand 10-year bond and the benchmark U.S. 10-year Treasury Note, yielding at 2.409% on Friday, widened to 0.306 percentage points.

The WTI crude spot price closed practically unchanged for the week, at $53.86 per barrel on Friday, while the Brent crude spot price lost 0.16% for the week to close at $56.65 per barrel, despite bearish EIA weekly reports on Wednesday. Crude oil bulls weighed in with arguments about EIA bearish data, as they were trying to defend crude prices. The bulls got huge support from the Paris-based International Energy Agency, or IEA, on Thursday, after reporting that it had estimated OPECís crude oil output at 32.1 million barrels per day, or bpd, in January with record compliance, and some producers, especially Saudi Arabia, cut more than pledged.

Short positions in WTI crude oil futures contracts held by producers or merchants totaled more than 657,566 contracts as of February 7, 2017, a record high, according to data from the U.S. Commodity Futures Trading Commission, or CFTC. The open interest also stands at a record high of 2,191,158 contracts, equivalent to about 2.19 billion barrels of WTI crude oil. Crude oil producers could take short hedge positions to lock in a future selling price to protect against a falling crude oil price. Some banks also require producers to hedge against future price risks as a condition for lending. 

The EIA weekly U.S. oil inventory report on Wednesday showed that domestic crude supplies increased by another 13.8 million barrels to 508.6 million barrels, excluding the Strategic Petroleum Reserve, in the week ending February 3, compared to the S&P Global Platts forecast for a stockpile increase of 2.5 million barrels. The American Petroleum Institute, or API, inventory data on Tuesday showed a U.S. crude inventory build of 14.2 million barrels. 

Separately, the EIA said the weekly U.S. crude oil production increased 63,000 bpd, for the week ending February 3, to 8.978 million bpd. U.S. crude oil output increased 8,000 bpd to an average 8.95 million bpd in February, compared to a January average of 8.942 million bpd. Output has fallen about 6.77% from the peak level of 9.60 million bpd in June 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count jumped another 8 to 591, compared to 316, when the rig count hit the low on June 6, 2016. 


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