Philippine Stocks to Decline on `Bearish Divergence': Technical Analysis

Philippine stocks may extend a decline from last week’s 28-month high as a “bearish divergence” formation on a chart shows the market is losing momentum, according to Banco de Oro Unibank Inc.

The benchmark Philippine Stock Exchange Index may test its 3,150 support level, Banco de Oro’s strategist Jonathan Ravelas said today in a phone interview.

The index climbed to a 2010 peak of 3,357.05 on June 4, surpassing the earlier peak of 3,330.42 on May 14. The gauge’s 14-day relative strength index meanwhile slid to 63 on June 4, from its peak of 73.3 on April 13, a so-called bearish divergence. The index has lost 2.5 percent from the high last week, underscoring predictions that the rally will end soon, Ravelas said. The RSI has slumped to 52.6 today.

“The market is losing momentum and it has downwards bias in the short-term,” he said. “I’d take profit on rallies until the index breaks the recent high and the RSI also reaches a high.”

The measure climbed as much as 2 percent to 3,288.46 today, the biggest gain in more than a week. The gauge may find support at 3,150 because it has recovered from near this level three times since April, Ravelas said. The measure rallied 5.1 percent in five days after retreating to 3,147.50 on April 20; surged 6 percent in four days after slumping to 3,142.06 on May 7; and gained 8.2 percent in eight days after plunging to 3,102.59 on May 25.

Ravelas on May 18 correctly forecast that the index may decline after forming a “triple top” pattern. The measure slid 5.7 percent to a two-month low of 3,102.59 on May 25.

The RSI identifies possible turning points in indexes or securities by measuring the degree that gains and losses outpace each other in a given time period. A reading below 30 signals a possible rally, according to technical analysts. A score above 70 is taken as a signal to sell.

Technical analysts observe price charts to forecast resistance levels, or ceilings restricting further price increases, and support levels, or floors limiting declines. The trading patterns and prices are used to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Ian C. Sayson in Manila at isayson@bloomberg.net

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