We use Spectral Analysis to help us analyze non stationary part of the stock prices. Traditional methods of using indicators and oscillators can only be used to predict the stationary part of the share price. This is because in normal market conditions share prices don’t move together but during markets crashes most if not all stocks will go down together. Hence there is a need to study this non stationary part of the stock prices with other methods and in this case with spectral analysis that will help give us a better timing on stock pices movements.
Anyway Spectral Analysis had long been used by geologists to estimate the amount of oil in an oilfield during exploration with great precision. Another advantage of using Spectral Analysis is that it needed only limited data to predict an outcome with great precision. Unlike Fourier Transform you will need at least 10-15 years of historical data to arrive at some accuracy in its prediction.
Let take a look at the following markets.
America – Dow Jones
What we can see is the Dow is in oversold condition and further drop will be capped and a rebound in stock prices is on the way next week. Nevertheless the Dow is just at the beginning of the down trend. More room to fall.The next level to test will be 11735.
Europe – Germany DAX
The DAX is quite similar to the DOW which is also in oversold condition and further drop will be capped and a rebound in stock prices is on the way next week. Nevertheless the DAX is just at the beginning of the down trend. We expect more room to fall. The next level to test will be 5845
ASIA – Jakarta
The bad news about the Jakarta Stock Exchange is that is closed for the last two trading days in the last week due to public holidays. When the market opens on Monday, we expect the IHSG index to dive between 80-150 points so as to make up for the two days losses. Nevertheless it will test the 3839 level next week.
ASIA – Kuala Lumpur KLCI
Kuala Lumpur’s Composite index’s fall will be capped by the following.
- Oversold condition
- Positive Divergence in RSI
ASIA – Japan Nikkei
Since it broke the 9390 level in early May, it has been free falling. Chances is that it might test the 8275 level before it will rebound. Oversold condition also help prevent further fall in the Nikkei and we expect a rebound in the Nikkei next week.
ASIA – Bombay Sensex
We expect the Bombay Sensex to rebound soon next week as it is already in an oversold condition with a double bottom forming in the RSI indicator. After that we expect to see it to test the next support at the 15135 level.
ASIA – Hong Kong Hang Seng
As expected with our earlier analysis, Hong Kong’s Hang Seng will free fall after it broke the 20,000 support level. The good thing is that the market is in oversold condition but further drop to be expected before any meaningful rebound can be expected.
Nevertheless the next support waiting to be tested is at the 17615 level.
ASIA – Singapore Straits Times
There is a big gap down in the last trading day and we will expect the index will rebound to this level. Market is highly oversold and it is screaming for a rebound next week not before another drop.
ASIA – Shanghai
We expect the Shanghai index to test the 2333 support level. Any breakdown will see the SSE to display further weakness. The danger on the SSE is that its RSI is Dverging, meaning further big drop in he index is expected soon.
South America – Brazil’s Bovespa
In line with our earlier prediction, after breaking the second support level at 61195, the Bovespa indeed free fall very hard. It manage to wipe out another 6000 points but it is highly oversold and we expect it to stage a rebound next week.
So all in all, Global Stock Markets performed badly for the week ending 20th May 2012 but most markets are already in oversold conditions. This means we expect to see a rebound in global stock prices in the later part of next week.
The only market that we expect to see a big dive is the Indonesian IHSG as it escaped two days of carnage and hence will have to make up for the losses next week.