Be extra cautious

The market once again proved its resilience by inching higher despite lacking positive catalysts for the equity markets and economy. Exports for April declined 26.3% year-on-year and 5.6% month-on-month while imports dropped 22.4% year-on-year but rose 8.8 month-on-month. Total trade in the first four months of this year dropped 24.2% from the same period last year. Market sentiments are mixed and desperately needing stronger catalysts to bring the equity market to new heights. The scenario is the same in other countries.

The recent short term improvement in the economy and weakening US dollar caused commodity prices to increase again. Price of gold soared again to near US$1,000 level. The price of Gold is trading around US$980 per ounce, up US$100 or 10% in a month. Price of crude oil has increased as well. Benchmark crude for July delivery is currently at $68.81 a barrel on the New York Mercantile Exchange. Crude oil price has increased about 37% since last month where price was trading around US$50. Price of crude palm oil traded in Bursa Malaysia is trading at around RM2,600 per metric ton. Two months ago, it was trading around RM1,800.

With the strong bullish sentiment, the KLCI up trend is able to hold. The KLCI is able to stay above the short term 30-day moving average (exponential calculation) and continues to distant away from the longer term 90-day moving average. The KLCI is 9.8% above the longer term moving average, 1% higher than the previous corresponding week. This shows a slightly stronger bullish momentum in last week’s upward move. The Ichimoku Cloud indicator shows no sign of major reversal at least in the next one month.

The 14-day Relative Strength Index (RSI) indicator stays flat after declining for the past three weeks. The bulls, which are currently in control is being able to hold the bears from bringing the KLCI down. Like the RSI, The MACD indicator has also started to move sideways. The 14-day Average Directional Index (ADX) which was declining since mid of May now started to increase slightly. These momentum indicators show that there is still strength in the current up rally.

The contraction in the Bollinger Bands in the previous week was short-lived and has now slightly expanded. There is a slight increase in the volatility of the KLCI movement. The KLCI is above the middle band and this means that the pressure that caused the increase in volatility is from the bulls. The shorter term volatility indicator, the 3-day Average True Range indicator maintains the same volatility between 10 to 16 points in the past three weeks.

There is still a chance for KLCI to climb a little higher because there is still strength in the current upward rally based on the technical analysis above. I have mentioned last week that the next resistance for the KLCI to test after breaking the 1,055 points immediate resistance level is 1,076 points. The 1,076 points level is a 38.2% Fibonacci retracement level from the longer term bear trend which begins in January 2008 to the low in October 2008. It is a crucial level in Elliott Wave studies to determine whether the current rally is a correction in a major down trend or the beginning of a long term bull rally.

There is a concern in the rising commodities prices and this may trigger inflation to rise again once consumer products start to increase. This is going to cause consumer spending power to shrink and thus slowing down the economy again. The weakening US dollar will cause US imports to ease as well. We are in the middle of the year and most companies including institutional funds are closing their books. What we may be watching is a mid-year window dressing because most of these funds were beaten really badly last year and they need to have better figure in their books.


Daily KLCI chart as at 4 June 2009 using NextVIEW Advisor Professional

Once again, investors should be extra cautious and patient and wait for a bigger correction to happen at least to longer term support levels between 970 to 990 points. The risk is just too high to get into the markets now, especially after June. In fact those who trade short term should get out of the market and take profits. Longer term investors may want to dispose some positions and accumulate again after the bigger correction. My Long term forecast of 600 to 650 points is still valid as long as the KLCI stays below the 1,076 resistance level. If the market does break above 1,076 points and stay above it, the next resistance level is at 1,160 points, half way point of the long term bear trend and I shall revised my longer term forecast.

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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.