Resistance at 1,040, small pullback expected

The bulls are running amok in the equity markets. Buying was broad-based as investors are becoming more confident in taking higher risk. The market was bullish the whole week. On Thursday, the KLCI opened on a bullish note at 1,031.83 points and went as high as 1037.81 before settling lower at 1023.47 points in the later session. The KLCI nearly tested the 1,040 points resistance level that I have mentioned last week. Trading volume was high at 3.67 billion shares exchanges hands. Equally interesting is the political scene in the state of Perak where a ruckus was created between two opposite political parties both claiming to be the legal government of the day in the state assembly.

Markets in the region have also been very bullish especially in Hong Kong and Taiwan. Even Thailand which is on a political dilemma was up. The KLCI rose 56 points or 5.8 percent on week, the highest since late September 2008. Trading volume continues to surge on week. The average daily volume for last week was 2.3 billion shares, up 35 percent from the previous week’s average volume of 1.7 billion shares. Trading volume on Thursday was exceptionally high, 3.6 billion shares exchanged hands.

The up trend continues with a strong bullish momentum and the KLCI is diverging further away from the averages. The KLCI is 13 percent above the longer-term 90 day moving average (90-SMA) which is currently at 905 points. The KLCI is now 13% above the 90-day average. The KLCI is also above the institutional benchmark average of 200-days. The KLCI has only retraced about 28% from the high of 1,524 points early 2008 to a low of 801 points in October 2008. Breaking above the one third retracement would be a little difficult and it is often used to show that the trend is really strong. The 33.3 percent is around 1,055 points.

There are little signs of a weakening uptrend. The Relative Strength Index (RSI) and Momentum indicators’ peaks are getting lower. These indicators readings are still favouring the bulls. The weekly MACD Histogram is still increasing. The declining ADX indicator last week has increased again this week. Therefore, the momentum of the KLCI trend is generally strong but showing little signs of weakness.

The KLCI is hovering around the top band of the Bollinger Bands which also means that momentum is strong upwards. The bands width which measures volatility stays firm after a slight decline last week. The firm volatility supports to ongoing uptrend. The 3-day Average True Range (ATR) indicator is strongly increasing, showing high volatility in the short term. The Stochastic indicator which was below the overbought line of 80% last week started to go above this line again. The KLCI has been overbought for the past one month in the short term.


Daily KLCI chart as at 7 May 2009 using NextVIEW Advisor Professional

The exceptionally strong volume with a slight decline in the KLCI momentum indicates some resistance. The KLCI may re-test the 1,040 to 1,055 points resistance level but there’s a very low chance it will be able to stay above it. It is not wise for investors and traders to jump into the stock market now. It’s better to wait for a pullback to around 910 to 930 points level. I mentioned that the market is expected to be positive last week but not this week. A small pullback is expected.

****

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.