Kuala Lumpur Composite Index Futures: Time to go Short?

Last month, there was an opportunity to trade between the uptrend channel. I have mentioned that a long opportunity exist because the FKLI is at the support line of the uptrend channel at 1,050 points. The FKLI went as high as 1,092 points. I also mentioned that there is a short-sell opportunity if the FKLI breaks below the uptrend channel. The FKLI went below the uptrend channel on the 17th of June when the KLCI was at 1,071 points. The KLCI went to as low as 1,031 points before the FKLI rebound immediately to close at the current level of 1,079 points.

The current up trend is being tested when the FKLI broke below the uptrend line channel on the 17th of June. This was expected because of technical bearish divergences on indicators such as RSI and MACD. The bearish divergences simply mean that the uptrend momentum is weak because of stronger resistance. For the first time since mid-March, the Stochastic indicator went to the oversold level when the FKLI went to a low of 1,071 points.

With FKLI currently being high and the momentum bearish, the risk in going short is lower than going long. Therefore a rally creates an opportunity to get ready to go short, especially if there are signs of bearish reversals after a rally. Bearish reversals can be indentified using technical indicators but my favourites are the candlestick pattern formations. There is currently a bearish reversal pattern called the Hanging Man on the FKLI chart. Therefore, a short opportunity exists now with a stop loss placed at 1,092 points. The FKLI would probably test the support level at 1,030 points and break below it.

Market volatility stays firm as compared to the previous month. The current 3 period Average True Range (ATR) indicator averages at 17 points. For those who are trading in the short term, a stop loss should not be placed less than 17 points, or better still a 1.5 times the ATR, which is 26 points. There is a high chance of you getting stopped out too soon if the stop loss is lower than the ATR. Therefore going short at current level is possible.



Daily KLCI chart with volume as at 26 June 2009 using NextVIEW Advisor Professional


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.