Kuala Lumpur Composite Index: Strong Resistance

The Malaysian equity market had a jittery start early this week as the KLCI fell to a low of 1,028.14 points on 23rd of June (Tuesday) but managed to close at 1,044.48 points. The reversal in price provides an opportunity for short term trading. In my analysis last week, I mentioned there is an opportunity when the KLCI falls to the next support level at 1,036 points. The equity market continues to rally for the next two days. It has rallied 4.2% from the low of 1,030 points.

From the performance in the market last week, investors sentiment was bullish as they go on bargain hunting when price falls steeply early in the week. The lack of fresh catalysts to boost the financial market and the spreading of the H1N1 virus did not have an impact on the investors’ bullish sentiment. Sales value of the manufacturing sector fell 26.2% in April 2009 to RM35.9 billion compared with the same month last year. Compared with March this year, the sales value dropped 1.6%. Meanwhile, total employees engaged in the manufacturing sector 7.7% year-on-year and 1.1% month-on-month.

On Thursday, share prices on the Malaysia stock exchange gained for the second straight day, settling just a fraction of a point off the day’s highest level, on positive leads from the regional bourses. The KLCI managed to climbed 19.7 points or 1.9% higher on-week to close at 1,074.11 points on Thursday despite falling steeply in the early of the week. Trading volume continues to be weak with only 1.4 billion shares as compared to 1.8 billion shares in the previous week. The volume has been declining since last month when daily average volume was above 2 billion shares.

After breaking below the short term 20-day Simple Moving Average (SMA) last week, the KLCI was able to be held above the support level of 1,036 points and is now back above the 20-day SMA. The underlying trend is still up as the 90-day SMA is still increasing and KLCI is above it. The leading trend indicator Ichimoku Cloud is still strong upwards but the cloud continues to become thinner. The contraction of the cloud started last week. However, the cloud is still thick enough to provide support to the current trend at least for the next one month.

Early last week, the bears were temporary in control as the momentum indicators went below to the bears’ area of control. The bulls immediately took control again later in the week. The RSI reading is back above the 50 points mid-level at 59.4. Momentum is slightly above the 100 points mid-level at 100.2. The mid-levels are levels that separate the bull and bears area of control. However, these indicators are still showing in divergence with the KLCI which means that the current underlying bullish trend momentum is weak.

Market longer term volatility continues to contract. The Bollinger Bands width is still tightening. The KLCI actually rebounded from the bottom line of the Bollinger Bands and is now slight above the middle line. The contracting bands suggest that the market is still in a correction. However, the short term volatility (daily trading ranges) continues to increase. The 3-days Average True Range (ATR) indicator now reads 16 points, almost doubled from two weeks ago.


Daily KLCI chart with volume as at 25 June 2009 using NextVIEW Advisor Professional

The market is eager to test the high of 1,096 points again. The next resistance level is at 1,160 points but the weakening momentum that indicates stronger resistance may prevent the KLCI from going to the next resistance level. The market is expected to consolidate further. Only if the momentum indicators make new a new high then there is enough strength to move higher. The RSI for example, has to go above 80 when the KLCI reaches 1,096 points. In the long term, the down trend target at 700 points is still valid if the KLCI stays below 1,160 points. The near term support level is at the recently created pivot low at 1,030 points while the next support level is at 1,000 points.

Short term trading opportunities available last week when the KLCI went to as low as 1,030 points like I have mentioned in the previous article. Now it is somewhere between the immediate support and resistance level. The downside risk is almost the same as the upside potential. It is better to stay out of the market this week.

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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.