Kuala Lumpur Composite Index: Market in Correction

The equity market starts to move into a correction this week with mixed investors sentiments. The concern about the economic recovery comes into question when the Department of Statistics reported that the manufacturing sales declined 26.2 percent from a year earlier. This is the sixth monthly decline consecutively. Other than this, rising commodity prices raises a concern on rising inflation which may lead to cutbacks in consumer spending. According to a release by the Department of Statistics, the consumer price index for the first five months of this year rose 3.3% against the same period last year.

Share prices on the Malaysia stock exchange closed lower Thursday for the third consecutive day on an expanding volume. The KLCI plunged 16.49 points or 1.54 percent to close at 1,054.41 points. The KLCI fell 34.55 points or 3.5 percent on week but 42.4 points or 4.2 percent higher on-month. Trading volume was generally weaker last week with a daily average of 1.81 billion shares exchanging hands as compared to 2.04 billion shares in the previous corresponding week.

Recession in the world’s largest economy, the US is losing steam following a two consecutive months of increases registered in the Leading Economic Indicator and less intense decline in the Coincident Economic Indicator. The recent announcement by US president Obama saying that the government shall set new guidelines to prevent a financial disaster in the future suggests that the current financial crisis is over and this provides a positive outlook for the economy. The US Dow Jones Industrial Average recorded its biggest gain in two weeks on Thursday.

Last week, I have mentioned that if the KLCI is able to maintain above 1,076 points, it may test the next resistance level at 1,160 points. I have also mentioned that the momentum of the upward rally was weak and there is a little upside potential. The KLCI is now below 1,076 points and will the KLCI rally to the next resistance level after this current pullback?

The price trend is still bullish in the long term as the long term 90 day moving average is still increasing and the KLCI is way above it. However, in the short term, the uptrend is being tested because the KLCI fell below the 20-day moving average that has been supporting the short term up trend since March. The gap between the KLCI and the 90-day moving average is starting to close up as the KLCI is now 6.4% above this average, as compared to 11 percent in the previous week. The leading indicator, the Ichimoku Cloud is still strong upwards, but the cloud appears to be thinner in the future. However, this indicator indicates that there should be now major trend reversal in the next one month. Therefore, the underlying up trend is still intact.

Momentum indicators are mixed. The RSI indicator is still above the 50-level equilibrium which means that bulls are still in control. However, the divergence between the RSI and KLCI indicates a weakening momentum in the short term. The MACD indicator has been weak since late May. The Momentum indicator has started to below the 100-points equilibrium after indicating a bearish momentum in the short term since mid of April. These momentum indicators therefore suggests that the bears have started to show its strength to cause a correction in the current rally and because of mixed indications, we have to wait at least for another week to see whether the bulls are going to continue to support the uptrend or let the bears take over.

The Bollinger Bands started to tighten again after expanding last week because price was forcing its way through the resistance level of the bands which measures volatility. The KLCI is now below the 20-day average. And this shows that the buying strength has started to weaken. The KLCI now moves into a correction. The shorter term volatility indicator, the 3-period Average True Range (ATR) has steadily increased in the past few days especially on Thursday. This shows some selling pressure in the short term. The ATR indicates a volatility of about 14 points, higher than the previous week’s ATR of 9 points.

The indicators are suggesting a correction in the market with the momentum indicators at borderlines and therefore difficult to make any forecast at the moment to know whether it can continue the rally to test the next resistance at 1,160 points. If the bulls are not supporting the bearish pressure, then a bigger correction downwards is expected especially of the KLCI breaks below the immediate support level at 1,036 points.


Daily KLCI chart with volume as at 18 June 2009 using NextVIEW Advisor Professional

There may be opportunities in the market if the KLCI rebounds at 1,036 points support level. Traders and investors can identify rebounds on the chart using chart patterns and candlesticks. If the KLCI does not rebound at 1,036 points, the next support level would be at the nearest pivot low at 1,000 points. In the long term, I maintain my bearish view with a target of 700 points as long as the KLCI stays below 1,160 points.

****

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.