KL Composite Index: Up trend starts to weaken

The bullish momentum in the equity market has started to ease last week after the KLCI went to a high of 1,037.81 points on the 7th of May. The market was in a trading range. I mentioned last week that the KLCI resistance is at 1,040 two weeks ago the KLCI has not broken above this level. Last week, the KLCI closed at 1,014.21 points on Thursday. The KLCI is down 12.57 points on week. Trading volume continues to increase another 35% on week with a daily average of almost 3.1 billion shares. Average daily trading volume in the past week and the week before are 2.3 billion and 1.7 billion shares respectively.

The market sentiment has started to be divided now. The market was bullish for the past 8 weeks. Despite having stronger volume, the KLCI has not gone up. This shows that there is a selling pressure that prevents price from going higher although there is still strong buying. The selling pressure is generally caused by profit taking activities by short term traders as the market has given them good profits from the 8 weeks rally. Other markets in the region faced similar situation with higher volatility.

The uptrend is still intact even for the short term but the bullish momentum has somewhat getting weaker. Last week, there were already little signs of weakness in the uptrend momentum. The KLCI is still high above its long term 90-day moving average, which is currently at 915 points. The KLCI is currently 10.6 percent above this average, 2.4 percent lower than the previous week. This shows that the momentum has started to become weak.

This can be verified by the declining momentum indicators like Relative Strength Index (RSI), Momentum and Average Directional Index (ADX). Another sign of the uptrend weakness is that the weekly MACD histogram has started to decline after 7 weeks of increase. Furthermore, there is a good increase in volume but the market does not go higher. All these indicators are showing a divergence against the KLCI trend and this means that the KLCI up trend is weak.

The market volatility has started to contract. The Bollinger Bands width has started to decline this week. The KLCI is moving away from the top band. These indications from the Bollinger Bands show that the KLCI has started to go into a correction. The 3-day Average True Range (ATR) has started to decline and this shows very low volatility in the past week. The Stochastic indicator which has been indicating overbought has now crossed below its 80% line, which means that the KLCI is expected to correct downwards. The last time it crossed below this line was on the 28th of April but the KLCI just went down for two days before continuing the uptrend again. The difference now and the 28th of April crossover is that the momentum indicators are showing divergences or weakening momentum.

The resistance in the KLCI has started to become stronger. Increased volume without good increase in price provides the first indication. The second indication is from the momentum indicators which are now in divergence against the KLCI trend. The third indication is the volatility, which is declining and a declining volatility means that the market is uncertain. Resistance remains at 1,040 to 1,055 points and there is a very low chance that the KLCI can break and stay above this resistance level.

With a much weaker momentum last week, the KLCI is expected to stay sideways or decline. The support level is at the mid- to long-term averages between 915 to 925 points. I am going to say once again that investors should wait for a pull back around this resistance level if they want to buy. In the long term, I am still bearish with the market as long as the KLCI stays below the 38.2% long term bear trend resistance level at 1,076 points. The long term target is now between 600 to 650 points, higher than my initial target of 550 points.


Daily KLCI chart with volume as at 15 May 2009 using NextVIEW Advisor Professional

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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.