Thailand's SET to Correct?

Templeton Asset Management's misery index of high inflation and high unemployment has spiked in Thailand.

As Mark Mobius, executive chairman of Templeton Asset Management explains, when inflation is high and unemployment is high, you basically have a miserably situation for most of the population -- people are unhappy, out of work and they have time to demonstrate And that's precisely what's happening in Thailand as seen by the state of emergency declared by Prime Minister Samak Sundaravej Tuesday. (Watch the complete Mark Mobius interview on the Thai market)

And while Mobius is bullish on Thailand as an investment destination long term, he's also looking for a 20% to 30% correction in the market. How will this latest chapter of political uncertainty affect Thailand's stock market?

The SET Index has been finely balanced with support at 660 to 665. This level provided support for the market in early 2007 when the SET tanked after the government implemented currency exchange controls. Many are anticipating the same support levels for the current political crisis.

It is a fine balance, with successful tests and rebounds in July, and twice in August. The most bullish chart analysis suggests this has the potential to develop a triple bottom. Experience in other Asian markets suggest this is a low probability outcome as triple bottom patterns have a high failure rate.

guppy sept 2 thai.jpg

Further evidence of the overwhelming strength of the downtrend pressure is seem with the Guppy Multiple Moving Averages (GMMA) relationships. The red long-term GMMA shows wide separation. When the rally developed in early August the long-term group did not compress. This suggests that investors used the rally as an opportunity to sell. Investors did not join buyers and the rally was quickly capped.

When we apply GMMA analysis its clear that the fine balance of support near 660 to 665 is an illusion. A weekly chart shows for a downside target near 590. And this has happened before.

In December 2006 the market took a one day dive and plunged to 590 -- a pile driver pattern low. This pattern is created by a sudden counter trend plunge. The market rebounds quickly, and the previous trend often continues. Traders recognize this as a zombie market. There is a high probability the pile driver low extremes will be tested again with a more sustained downtrend. It's an early warning signal to sell out of long positions and develop shorts.

The initial target after a fall below 660 is set at 620. This is calculated by measuring the height of the failed rebound rally from support at 660. This value is then projected downwards to give a target near 620, which is near to the closing level of the December 2006 plunge. In the longer-term historical context, these pile driver lows establish potential future support levels and suggests the next support below 620 is around 590.

These target levels are indicative and are not predictions. The GMMA confirms very strong downwards pressure. The target levels are points where traders will look for evidence of a trend pause, a consolidation pattern, or a temporary rebound. They identify areas where traders may consider entering the market from the long side.

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