Kuala Lumpur Composite Index (KLCI): KLCI bullish and resistance at 1,040

The swine flu outbreak has caused equity markets to sneeze including Malaysia. The KLCI fell heavily on Monday and extended to Tuesday. The KLCI was bullish on Friday and closed almost at the six-month high at 992.68 points and in the next two days, declined 27 points to settle at 965.70 on Tuesday. The market rebounded on Wednesday after a bearish session in the early morning. The KLCI went as low as 952.37 points in the early morning but later climbed to close at 967.46 points. Markets in the region advanced strongly.

The KLCI remained almost unchanged on-week. The KLCI was at 968.58 points last Wednesday. However, the KLCI is up 98 points or 11.3 percent on-month. The KLCI level a year ago was at 1,283.65 points. The market has become more active now and trading volume continues to grow. The daily average volume for a week has soared to 1.7 billion shares, 54% higher than the daily average in the previous corresponding week. More than two billion shares exchanged hands on Friday and Monday, something we have not seen in a long time.

Investors are gaining more confidence now after Prime Minister Najib announces liberization on the finance sector after doing so on other services sub-sectors the previous week. Other positive developments include the US Federal Reserve saying that the recession has started to ease and Japan’s industrial output rose for the first time in six months. Production in Malaysia has improved as well with the Labor department getting more requests from manufactures for production workers. The securities commission and Bursa Malaysia is expected to announce major changes in the equity market next week which may be viewed as positive.

Is this really a beginning of a bull run or the market is still in a long term down trend correction? The KLCI continues to break above technical resistance levels for the past few weeks without having a rest. Volume has increased tremendously. Analysts including yours truly are being strongly tested. Ever since the KLCI broke the 940 points resistance level which changed my bearish forecast, the KLCI continues to climb without looking back. The next resistance of 970 points was also taken out. Is the KLCI going to take out the next resistance level, and where is it?

There is no doubt that the trend is up in the short term. However, it is still unclear for the long term trend because it is in a transition period. The short to long term 30- to 90- day moving average continues to increase and the KLCI stays above these averages. The KLCI also continues to stay above the 200-day moving average. However, the KLCI has only retraced about 24% from the high of 1,524 points early 2008 to a low of 801 points in October 2008. The uptrend is still in transitional stage.

There is a high chance for the market to break new highs and test resistance levels because of the strong bullish momentum. The daily Relative Strength Index (RSI) and the weekly MACD indicators are still making new highs and this means that the uptrend is still strong. However, the daily Momentum indicator is showing divergence. The ADX has started to decline last week after advancing since the beginning of April. If the KLCI can go above 1,000 points level, then all these indicators will be in convergence again.

The recent pull back has caused the Stochastic indicator to go below the overbought level of 80. It has been above this level since late March. Nevertheless, the Stochastic is still considered overbought because of the relationship between the KLCI and the averages. The distance between the KLCI and the 60 and 90 day average is 67 points or 7.4 percent. The volatility in the longer term has declined with the Bollinger Bands width declining moderately. However, the short term volatility has increased as the 3-day Average True Range (ATR) indicator has increased in the past few days.


Daily KLCI chart as at 29 April 2009 using NextVIEW Advisor Professional

Based on current developments fundamentally and technically, there is a high chance that the KLCI may increase further in the short term. The next level for the KLCI to test is 1,040 points, which is a price target objective based on a 6-month double bottom chart formation. As market sentiment is very bullish, expect smaller pull backs rather than a bigger correction until the momentum indicators start to weaken. Therefore the KLCI is expected to be in positive this week.

In the long term, I am still bearish about the market. If the KLCI stabilizes above the 1,000 points level, then I may not be bearish anymore. Therefore, with more information when the time comes, I will make the necessary adjustments. Current data is still not convincing enough to believe that the market has started a bull run.

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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.