Kuala Lumpur Composite Index: Time for a pullback

Trading volume has increase tremendously with volume exceeding RM1 billion shares daily last week. Last week’s daily average volume was RM1.49 billion shares, 80 percent higher than the previous corresponding week’s average. On Thursday, the trading volume was almost RM2 billion. It may look good when the price trend is supported by strong increasing volume, but a jump or extreme increase in volume with smaller upward movements in the market may signal an end of a rally.

Technically, the down trend correction has extended after it broke the 940 points level extension should last until 970 points. The short to long term 30 to 90 day moving averages have started to increase but price is currently at the 200-day moving average which is currently at 963.30 points. The 200-day moving average is normally used as an indicator to indicate the long term trend by long term hedge funds. Therefore the KLCI is currently at a long term resistance level and we should see a down movement next week.

The Relative Strength Index (RSI) and Momentum indicators continue to make new highs indicating a strong up trend and the bulls are in total control. The weekly MACD histogram and daily ADX indicator continues to climb indicating that the long term momentum is also still bullish. The KLCI is staying at the top band of the Bollinger Bands. The KLCI has been overbought for three weeks in the short term. The Stochastic indicator is still hovering at the overbought level of 80. These indicators are indicating very strong bullish strength. However, the weekly Stochastic reading is now oversold and the last time it was oversold was when the market peaked at 1,500 points.


Daily KLCI chart as at 16 April 2009 using NextVIEW Advisor Professional

The KLCI managed to stay in the uptrend by staying above the moving averages. The KLCI is 8 percent above the averages which is considered overbought. I have been cautiously bullish for the past few weeks but with price currently at resistance levels, I believe it is time for the KLCI to pullback downwards. When the market gets greedy (as can be seen in the high increase in volume), it is time to be fearful. This is a quote from legendary investor, Warren Buffet.

I have mentioned previously that if the KLCI breaks above the 940 points level, I have to make a change in the long term forecast. I am still not convinced that the long term down trend is over. The current upward rally is an extension of the downward correction which has a target of 970 points. I will only be convinced if the KLCI can go above this level and stay above it. In the meantime, the long term target is revised from 550 points to 600 points. The KLCI is currently near 970 points level and let’s watch if the KLCI still has the momentum to go higher and stay above it but in the short term, I am expecting the KLCI to move downwards to 900 points, where the averages are.

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Article contributed by Private Trader, Market Expert, Trading Coach and Chief Market Strategist of Nextview, Mr. Benny Lee. For more articles and commentaries from Benny, click HERE.