ECONOMIC STRATEGY - CHINA and US Markets

The Chinese and the US economies have developed divergent paths. One is a strong vigorous bamboo shoot whilst the other shows green shoots which some people are now describing as withered or yellow shoots. It’s an issue I discussed last week on CNBC Asia with US fund managers and Asia analysts. China GDP due out this week is expected to show a 7.8% annual growth and some analysts are questioning whether this is sustainable. We start with current China market analysis and conclude with US market analysis. The first extract is from my weekly column in the Beijing financial weekly, Hong Zhou Kan, and the second extract is from my weekly column in the Monday edition of Shanghai Security News.

CHINA MARKET

China markets are focussed on the potential end of a prolonged uptrend. The very rapid rise in the Shanghai Index above 3000 was an inevitable invitation to a pullback and retest of the 3000 support level.



The key question is to decide if the pullback is the collapse of a bubble, a major change in trend direction or a temporary retreat in a well established uptrend. The answer has a significant impact on Hong Kong and Taiwan markets which have been increasingly linked to the Chinese recovery. Chart analysis provides the tools to help answer the questions more accurately than the mixed bag of delayed fundamental information that comes out of China in Government reports and anecdotal evidence. The market moves 3 to 6 months ahead of the confirming fundamental information.

The market has avoided a bubble situation. The index has clustered near the upper edges of the short term GMMA and the pullback has tested the lower edge of the short term GMMA. The pullback has restored the normal degree of separation in the short term GMMA. This reduces the probability of a bubble developing.

The most important analysis tools for identifying a major trend change are divergence patterns and chart patterns. The most reliable analysis tool for the Shanghai market is the Relative Strength Indicator (RSI) divergence. This develops when the trend line placed on the RSI moves in the opposite direction to the trend line placed on the Shanghai index. Currently the trend lines both move in the same direction and this is a trend continuation confirmation signal. This suggests there is a low probability of a major change in the direction of the trend.

The behaviour of the index suggests the current market activity is a temporary retreat in the environment of a strong and stable uptrend. The strength of the uptrend is confirmed by the long term GMMA. The lower edge of the long term GMMA is higher than the historical support level near 2700. It is also near to the value of the up trend line. The upper edge of the long term GMMA is near the historical support level of 2900. This combination of support features confirms strong support for any market retreat below 3000. They show a high probability of a rebound and a continuation of the established uptrend.

The 3000 level is a strong historical support and resistance level so the market may develop into a sideways pattern and a broad trading band in the 2900 to 3000 area. This sideways movement will add more stability to the up trend.

Increased trend stability and durability will have a positive impact on the greater China markets. Traders can use this pause as a buying opportunity to add to positions as price declines are more likely to be a temporary retreat rather than a trend change.


US MARKET

The key development in the American DOW Index is the development of a rounding top pattern. The rounding top pattern is a reliable indicator of a significant trend change. This rounding top pattern is shaped like an umbrella. The upper edge of the pattern is located near 8900 and the support level is near 7800. The distance between support and the peak is measured. This value is projected downwards below the support level to give a potential downside target. This is located near 6800.



The pattern is confirmed in two steps. The first pattern confirmation develops when the DOW Index is not able to move above the value of the curved downtrend line. This is currently near 8300.

The second pattern confirmation comes when the DOW index closes below the support level at 7800. When these conditions develop there is a high probability to market will continue to fall and reach the target low near 6800.

The DOW Index also has developed a small head and shoulder chart pattern. The left shoulder is created by the rally in 2009 May. The head is created by the rally in 2009 June. The right shoulder is created by the current rally. Currently this chart pattern is not completely developed. There is enough information to estimate the head and shoulder downside target projection. This is located near 7300.

The rounding top and the potential for the head and shoulder pattern development both confirm the high probability of a continuation of the downtrend in the DOW index. The suggested target for the market fall is between 6800 and 7300.

Too many Western analysts are blinkered by the belief that economic recovery is entirely dependent upon the US and they ignore the market reality shown by the market index activity.

To read more articles and commentaries from Daryl Guppy, click HERE

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Article contributed by Private Trader, Market Expert, Trading Coach and Best-Selling Author Mr. Daryl Guppy. For more articles and commentaries from Daryl Guppy, click HERE.

Kuala Lumpur Composite Index (KLCI): Bullish sentiment expected to continue

The equity market extended its bullish run last week as investors continue to be bullish amid positive developments in the global economy particularly in the Asian region. In the second quarter, the Dow Jones Industrial Average climbed about 11% while Japan’s Nikkei 225 jumped 23, China Shanghai Composite Index rose 25%, and India 53%. The benchmark KLCI rose 43.27 points or 3.9% on week to close at 1,152.15 points. The KLCI tested the 1,160 points resistance level I mentioned in the past two weeks on Wednesday but failed to stay above it. The index already raised 7.15% on-month and 37.8% from the low this year.

The economy in the Asian region has been positive in the past few months. Industrial production increased as demand from major importing countries in the US and China has improved. The question is now whether the short term economic growth can be sustained and analysts’ views are mixed. However, market confidence is still generally strong. Most markets are making new highs for the year in the past few weeks, overcoming technical resistances. Trading volume in Bursa Malaysia last week remains steady with 1 billion shares traded averagely a day, the same as the previous corresponding week.

The bulls were back as I mentioned in my previous article and last week they dominate the market. The uptrend started to become healthy again with the short to long term 30- to 90-day moving averages are moving in the same direction upwards. The moving averages ranges between 1,020 points and 1,080 points. The one month correction which began in mid June has ended last week. The KLCI is now comfortably 13% above the long term 90 day average.

Momentum indicators are showing strong bullish strength. The RSI indicator has gone above the 70 level after being below it for more than one month. The MACD indicator continues to stay above its 9-day average. The momentum reading is currently at 108, a level not seen since April this year when the market was in the beginning of a bullish rally. The ADX indicator continues to increase with the PDI and MDI lines still expanding.

The market volatility continues to expand in the upside after breaking out last week. The Bollinger Bands continue to expand further. The KLCI continues to stick at the top band for the whole of last week. The last time the Bollinger Bands expanded this much was in early April when the KLCI was at 930 points. The shorter term volatility indicator, the 3-day Average True Range has weakened a little from 18 points in the previous week to 16 points this week. This indicates a slightly lower momentum on a daily basis.

With the healthy trend and good bullish momentum, can the KLCI rally higher than the 1,160 resistance level? If you have not read my past articles, the 1,160 points level is a 50% retracement level of last year’s bear trend where the KLCI dropped from 1,524 points to a low of 801 points. Purely based on technical analysis, yes, there is a high chance that the KLCI may be able to break above 1,160 points. Bullish sentiment expected to continue with a greater extent if the 1,160 points resistance level is broken. If it does break this level, then we may look at the next technical resistance level at 1,300 points.


Daily KLCI chart with volume as at 23 July 2009 using NextVIEW Advisor Professional

The leading indicator, the Ichimoku cloud indicator is still thin and this is because of the one month correction on the KLCI in mid-June. If the market continues to be bullish the cloud may start to expand in about two weeks time, providing another good support to the KLCI. The KLCI is also being supported by a linear up trend line from March this year. The immediate support level is this trend line and is currently at 1,100 points. The Stochastic indicator has been overbought since last week and we may expect an immediate pullback, especially when the KLCI is at the current resistance level.

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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.

ASTUTE INVESTORS – EVERYONE DREAMS OF BECOMING ONE

Buy low sell high – a stock market adage easier said than done. In pursuit of putting this proverb into practice, sometimes an investor buying stocks at a low price ends up selling at much lower levels when the share price continues to slide and he must take steps to preserve his capital. Buy low sell high turns out to be buy low sell lower. Worse, if the price of that same stock moves higher within weeks or months after the sale!



There are also investors who are afraid to buy when prices are falling, lest they “catch a falling knife”. Indeed, catching falling knives can lead to financial disaster. However, if one knows how and when to “catch the falling knife” in a correct manner, the reward could be awesome compared with the bleeding suffered earlier.

To be able to do that, the investor needs to be an “astute investor”, a term used by stock market guru, Charles H. Dow, to explain the three market phases in his basic tenets of a financial market.

According to Dow, astute investors are those who sell their shares in the final phase of a bull market when everyone else seems busy recommending a buy and chasing to buy shares at higher levels, and they accumulate in the final phase of a bear market when everyone else seems busy recommending a sell and disposing stocks at lower levels.

If we were to recall the first three months of this year, many investment experts were divided on whether the KLCI would continue to slide, had reached a significant bottom or was nearing an important floor.

Having attended many investment seminars during that time especially in March, there were pundits predicting the index would slide further to around the 650 levels and there were some who envisaged the market having reached the bottom so long as the index did not break below the 800 levels.

There were also some who played safe by recommending a 50% exposure in equity due to the heightening global economic uncertainty then, notwithstanding the extremely attractive valuations of many blue chip companies.

After hitting this year’s lowest closing level of 838.39 points on 12 March, the KLCI advanced by 237.38 points or 28.3% up to 29 June, with many fund managers’ darling stocks that had become penny stocks registering returns beyond 100%.

The main question in the minds of many investors and traders would probably be whether an astute investor should use technical or fundamental analysis, or both. Indeed this issue is debatable and each of the fundamental and technical analysts would probably say that their approach is the best.

In fundamental analysis, experts would look at the potential of a listed company in terms of earnings, cashflow and dividend payable during the current and following financial year, given the company’s business operations and the economic environment. The forecasts on earnings, cashflow and dividend would allow an investor determine the important market ratios of price earnings multiple, price cashflow multiple and dividend yield.



In technical analysis, experts would look for reversal patterns to determine the end of a bear or a bull market campaign. In a bear market campaign, they would analyse the major trendline resistance, price formation, indicators and volume action, and monitor if a breakout has occurred.



The above basic analyses are indeed inadequate to determine a major market bottom and market top.

While fundamental analysis guides investors in terms of market ratios, the question is, what are the ratios deemed reasonable for investment or divestment? Price multiples are indeed moving targets in both bull and bear markets.

In addition, one would find that there were continuous downward adjustments in earnings, cashflow and dividend when the major economic trend is negative, resulting in depleting fair valuations for stock even after share prices have come down significantly. The opposite is also true when the major economic trend is positive.

As for technical analysis, no technician will be able to determine a market bottom until a reversal is established. For a confirmed reversal of a bear campaign, the price should have already been off low and for a confirmed reversal of a bull market, the price should have already been off high. Hence, it would be difficult to buy at the trough and sell at the peak.

So, what’s the solution? Based on observation amongst investing friends – professional and individual investors – there are at least five solutions: use the right economic indicators; be a market contrarian at the right time; be a risk taker at the right price; conduct an advanced fundamental analysis which takes into account its price behavior; and conduct an advanced technical analysis.

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Article Contributed By Ameer Ali Mohamed. Ameer is Director, Financial Research of NextVIEW. He has a total of 20 years experience as a corporate journalist, investment analyst and fund manager, including as research head of two stockbroking firms and CEO/CIO of a funds management company.



Republished with permission. This article was published in the Just Say It column in Shares Investment (Malaysia edition) July 2009. You can get the latest copy of Shares Investment (Malaysia edition) at leading bookstores in Malaysia.

Price of FCPO expected to trade sideways with a bullish bias

The price of FCPO (Crude Palm Oil Futures on Bursa Malaysia) continues to fall as I have expected in the past one month but fell lower than expected. There is a technical support level between the price range of between RM2,100 and RM2,200 per metric ton but the FCPO went as low as RM1,990 from RM 2,400. The price rebounded and is now at RM2,020. However, the market did rebound temporarily from RM2,150 to RM2,340 from 22nd to 26th June before making its way down again.

Tree replanting efforts is being continued by the government may caused production to fall further in the coming months and cut more supply to the already shortage in current palm oil supply to the market. Plantation Industries and Commodities Minister Bernard Dompok is confident optimistic about higher oil price in the months ahead. Cargo surveyors SGS Malaysia and Intertek Agri Services estimated a 15% and 18% on-month increase in the July 1 to 15 period. Fundamentally, price of FCPO should increase as the cut in supply and increasing demand may push prices higher.

The market has provided a good trading range for traders. The 14-day average true range (ATR) which measures volatility is 75 points or 3.6%. However, average trading volume has been declining but the average open interest is increasing. This simply means more traders are sitting on open positions for a longer term rather than trading them short term in the market. The 30-day average volume was 9,200 contracts, 15.6% lower than the previous month’s average. The average volume has been declining for two consecutive months.

The price of FCPO was still in an up trend last month when it is above RM2,300 (which is the 90-day moving average). At current price, the trend is now down. The 30- and 60- day moving averages have just started to decline. However, the current down trend seems week because momentum indicators are in divergence with the trend. The Relative Strength Index (RSI) indicator pivot lows are higher despite lower FCPO pivot lows. The Average Directional Index (ADX) which was increasing since mid-June has started to decline as well, indicating a weak down trend momentum.

The long-term average is currently between RM2,100 to RM2,300 and therefore price is currently slightly below this long term average range. With the current bullish momentum and positive fundamentals, the price of FCPO has a high chance to move higher and probably test the upper level of the trading range which is RM2,300 if the price is able to break above the immediate resistance of RM2,150. So, expect price to be trading sideways with a bullish bias. Current support level is RM1,950 and if this level is broken, the next support level is at RM1,800.


Daily FCPO chart with volume as at 16 July 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.

Kuala Lumpur Composite Index (KLCI): The bulls are back

Just when the technical indicators are showing a bearish reversal in the making, the market turns more bullish last week and set an 11-month high. After one week of almost no change in the KLCI, the benchmark index closed 1,108.88 points Thursday, climbing 43.2 points or 4 percent from last week. The increase comes from the past three days as the market was generally weak in the early of the week. In my previous article I have mentioned that it is very unlikely that the KLCI can go higher above 1,080 points because of the weak momentum and if it does break above this level, then the KLCI may test the next resistance level at 1,160 points.

The Malaysian market advances together with the regional markets after a rally in the US market. The US market rallied strongly as better than expected earnings are reported especially in the financial industry and the U.S. Federal Reserve expects recession to end soon. Prices of commodities which have been declining since the past one month have started to rebound indicating investors’ confidence.

The market gained a little more confidence with buying activities in the past three days. The daily average volume last week was 1040 million shares, up 26% from the previous corresponding week’s daily average of 825 million shares. The positive US news coupled with better than expected economic data such as higher month-on-month manufacturing sales and exports. However, year-on-year performance is still way below the previous year. Analysts are also expecting a better economic data in China which may boost Malaysian exports further.

The KLCI overcame two pivot highs in three days. The market has turned bullish again when the KLCI broke above the 1,080 and 1,094.60 points pivot high resistance levels. The KLCI is still in a major uptrend as it is able to stay above the 90-day moving average since early April this year. The 30-day average which was moving sideways in the past three weeks has started to increase again and indicates that the short term up trend is continuing upwards again.

Momentum indicators have changed its readings. In the past two weeks they were bearish but now the momentum has turn bullish. The MACD indicator has crossed above its 9-day average after staying below it since last month. The RSI indicator has created a new pivot high and above the 50 mid-level. The Momentum indicator is above the 100 mid-level and is in convergence with the KLCI. The ADX indicator which has been declining since last month has started to increase. These indicators show that the bulls are back.

Market volatility has been declining since three weeks ago and has started to break out of its comfort zone after the three days rally. The Bollinger Bands has started to expand with the KLCI above the top band indicating a strong breakout upwards. Normally markets are expected to continue its rally when there is a strong breakout upwards. The 3-day Average True Range (ATR) which measures the average trading range for the past 3 days doubled from 9 points to 18 points last week.

Can the KLCI rally further upwards to test the 1,160 points resistance level? This resistance level is the 50% retracement of last year’s bear trend where the KLCI plunged from a high of 1,524 points to a low of 801 points. The momentum indicators and upside volatility breakout suggests a strong start and there is a high chance that the KLCI can climb further. However, the Ichimoku Cloud continues to be thinner. Market normally fragile (sideways trend) when the Cloud is thin and according to this indicator should happen in next month as the cloud is a leading indicator that is plotted one month ahead.

The market is expected to be slightly bullish next week. I’d expect the KLCI to test the 1,160 points resistance level if it is able to stay above the resistance level which it just overcome and that is 1,094 points. If the KLCI goes back below this level, then expect the market to trade sideways. An immediate pullback is expected to happen as the current level is slightly overbought in the short term. The 14-day Stochastic Oscillator is now above the 80% overbought level. Immediate support level is at 1,058 points.


Daily KLCI chart with volume as at 16 July 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.

Kuala Lumpur Composite Index: Bearish Reversal in the making

It has been a slightly bearish week for the Malaysian equity market as investors are worried about whether the current economic improvements are able to be sustained in the long run. The up-trend of most markets has currently come to a halt has investors are concerned that the equity market has gone far ahead of the economic fundamentals. Lack of buying interest pressured to market to fall last week. The KLCI fell 13.03 points or 1.2% lower on-week and 6.11 points lower on-month to close at 1,065.68 points Thursday. The bullish sentiment has started to change its course.

In the International Monetary Fund (IMF) World Economic Outlook Update released Wednesday, it expects global economy in terms of gross domestic product (GDP) to shrink by 1.4% this year against its earlier forecast of 1.3% released in April. As for next year, it lifted its forecast to a growth of 2.5% against an earlier projection for a 1.9% growth. Recent decline in the prices of commodities like crude oil, gold and edible oils expands investors fear of the current economic growth. The leading consumer market in the world, the United States employment rate continues to increase and house prices continue. They are starting to spend less again after some confidence few months ago.

Technical indicators already detected sluggish momentum in the uptrend a few weeks ago. The KLCI is below the short term 30-day moving average again the second time since end June. The short term up trend is being tested again, and this time with a stronger bearish momentum. The longer term 60- and 90-day moving averages are still increasing indicating that the underlying up trend is still intact.

However, the increasing bearish pressure has caused to uptrend momentum to weaken further. The RSI and MACD indicator do not show any signs of improvement in the long term up trend momentum last week. Trading volume shrunk further with a daily average of 825 million shares last week as compared to 1 billion shares in the previous week. The bulls are hesitating now and the bears are slowly marching in.

The Ichimoku Cloud indicator has started to widen a little but remains at the same level and it looks like the KLCI is moving towards to cloud of uncertainty. The thickening cloud in a side way movement indicates that the market is getting more uncertain. However, this indicator also indicates that there should not be any strong reversals in the next one month. The ADX indicator is declining with its PDI and MDI lines crossed each other three times in one month.

Market volatility seems to be calmer now. The Bollinger Bands difference has declined. The KLCI is currently right in the middle of the bands. The uncertain market sentiment as caused the short term volatility to decline. The 3-day Average True Range (ATR) is currently at 8.8 points, slightly lower as compared to the previous weeks ATR of 10 points.

Traders and investors should also be aware of the latest developments in the US. There is a cause of concern now on the Dow Jones Industrial Average chart. A bearish trend reversal chart pattern has developed on the Dow chart. The reversal is technically confirmed once it breaks below the pattern’s neckline at 8,220 points with a target of 7,600 points. The Dow is currently at 8,178.41 points. It is normal for Dow to come back above the neckline but if it fails to stay above it, then we may see the bearish rally.

The KLCI is unable to break above the near resistance level at 1,080 points and it has become an intermediate swing high based on Barros swing calculation. This is the first lower swing high since the bull trend started in March. This, with other technical indicators is suggesting stronger resistance. It will take a very strong fundamental catalyst to boost the market to overcome strong resistance and we do not see any catalyst in the very near future. If the market does break above 1,080 points then short-term traders may have a buy opportunity as the KLCI is expected to rally to the next resistance level at 1,160 points but I doubt if it will go above 1,080 points because of the weak momentum.

Immediate support level remains at 1,030 points and a longer support level is at 1,000 points. The KLCI continues to be uncertain in between the support and resistance levels and is therefore difficult to even trade. I have mentioned last week that traders should stay out of the market and liquidate some of their positions if they have a position as volatility is low. The advice shall be the same this week.


Daily KLCI chart with volume as at 9 July 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.

Singapore Stock technical Analysis - Capitaland

Speculations in the property market that it may rise because of recent buying activities. However, the prices of property stocks have been stagnant with a slight bearish movement for the past one month. Property stocks have been on a good bullish rally from March. The FT Real Estate Index jumped more than 80% from the level in March to June. I guess that the prices of properties stocks have gone too far ahead of the fundamentals.

One of the biggest real-estate public–listed companies in Singapore is Capitaland. Capitaland’s share price in March was around $1.90 and it went as high as $4.00 in June. This is more than a 100% increase. The share price, as at 3 July is $3.61. For the past one month, the price has made short-term lower highs and lower lows. Technically this means that the price is in a short-term down trend. This can also be confirmed by the short-term 30-day moving average which has started to decline a few days ago.

In the longer-term time frame, price is still in an up-trend. The 90-day moving average is increasing and is 16% below the current price. The momentum the up-trend is weak. Based on the Relative Strength Index (RSI) indicator which has gone below 50 (the mid level that separates the bulls and bears strength), the bears have started to dominate to market. The MACD indicator which started to show bearish momentum since early June continues to show bearish strength.

However, there is no strong selling pressure seen in the past one month as trading volume has been declining for the past one month. The price movement for the past one month has formed a correction pattern on the chart called the “wedge”. This is a trend continuation pattern. These indicators suggest that the price is more likely to be in a correction than a selling pressure. The trend continuation depends on the completion of the wedge pattern.

At current price level, the correction is not over until price moves to $3.20. If it does go below $3.20 then selling pressure may begin. So, there is still some room for price to go lower in the short term. During this correction, the up-trend may start to continue its journey if it breaks the resistance level of the wedge pattern which is currently at $3.70. Therefore, the price of Capitaland is still in a corrective mode if it stays between $3.20 and $3.70.

If the price continues its trend, the technical price target is $4.60 with a resistance at $4.10. Recently, many analysts have upgraded the target price for Capitaland from below $3.00 to between $4.00 and $4.60. Immediate support level is of course at the wedge support level at 3.20 and further below is at $3.00. The weekly Average True Range (ATR) for the past three weeks is $0.32 or 9% from current price. A stop loss should not be lesser than this ATR to give the price enough room to move.


Daily Capitaland chart as at 3 July 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.

US Dow Jones Industrial Average (DJI) – Signs of a bearish reversal

In my last article I mentioned that the DJI has more potential upside if the DJI breaks and stay above the resistance level at 8,600 points. The DJI did break above this level in the early of June but failed to stay above it after two weeks. The DJI went as high as 8,877,93 points before making its way down to close at 8,438.39 points end June. There were no positive catalysts to boost the market further upwards as compared to the month of May. The DJI is currently being supported at 8,200 points.

For the past two months, the movement in the DJI has formed a chart pattern called the “head and shoulders” which can be seen on a daily chart. This is a bearish reversal pattern and is technically confirmed once it breaks the pattern’s neckline at 8,220 points. The bearish divergences of indicators against the DJI suggest strong resistance and therefore the momentum of the uptrend is expected to be weak. These are signs of a bearish reversal pattern. The head and shoulders pattern has a price target at 7,600 points. However, there is a technical support level at 7,900 points.


Daily DJI chart with volume as at 2 July 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.

USING THE CHAIKEN A_D OSCILLATOR By DARYL GUPPY

This is a market about momentum. – finding it and setting stops. We have been looking at momentum stocks and exploring the relationship between volume and price activity. The key observation with these stocks is that price increases dramatically on high volume and that the price retreats are accompanies by much lower volume. The change in this mirror activity where a fall in price is matched by higher volume suggests a weakness in the trend. This relationship between price and volume can also be explored with a Chaiken Oscillator. This oscillator is built around three assumptions.

• The first is that if a stock closes above its median value for the day, then the stock is being accumulated. The closer the stock closes to its high for the day, the more accumulation takes place. Accumulation means, that buyers are confident that the price is likely to continue to increase.

• The second assumption, is that a healthy rise in price is not only matched with a rise in volume but that that volume also shows accumulation taking place. When volume lags behind price rallies, it shows that less buying power is available to move the stock price higher. This makes for a weaker trend.

• The third basis for the Chaiken Oscillator, is that you can monitor the flow of volume into and out of the market on a comparative basis. Essentially this is done by using two moving averages, 3 day and 10 day, comparing volume changes with changes in the advance or decline of price in relation to the median price for each day.

The oscillator comes with two rules.

• The first is the standard oscillator rule that has traders looking for a divergence between new price peaks and oscillator peaks. Personal observation suggests that this rule is not particularly useful in Australian markets.

• The second rule, is to use the change in the direction of the oscillator as a buy or sell signal. If the oscillator moves up above the zero reference line then a buy signal is generated. This is only acted on if the stock is already in an up trend. The up trend is defined traditionally by a 90 day moving average. This is probably a bit slow, leaving too much room is current volatile markets. We find the 30 day moving average to be a more useful indication of the up trend.

If we apply the Chaiken Oscillator to SEN, we see that it confirms the relationships we noted in previous weeks. First SEN is above the 30 day moving average. This sets the trader up for acting on entry signals above the zero reference line because the trend is up. At point A the Chaiken Oscillator moves above zero just prior the major increase in volume that is an initiating signal that we looked at in previous newsletters. We see the same relationship at B, C and more recently at D. When the value moves above the zero reference line and when it is accompanied by an increase in volume, then a buy signal has been indicated.



What this is allowing the trader to do, is to buy the retracements or pullbacks in a trend with a greater level of confidence. When the SEN price falls from its high of $0.70 and makes a low around $0.60, then the Chaiken Oscillator allows the trader to see this price retreat in the context of a continuing trend. This is always a trader’s dilemma. We want to buy into strong trends but we want to get a bargain price. When the bargain price turns up, were not very confident about buying it because we are worried that the trend might have changed and really be starting to go down. The Chaiken Oscillator is a tool traders can use to confirm the strength of the trend and the validity of these cheaper entry points.

The Chaiken Oscillator is not a stand alone indicator. It is most usefully applied as a confirmation for relationships identified initially by other indicators. In momentum stocks these Chaiken relationships are strong and generate few whipsaws. This is less evident in stocks where volume is less erratic.

The Chaiken Oscillator in Metastock is a standard default formula and appears to be calculated on a different basis to that of Trade Station. In the Trade Station version the plot is inverted and also appears to be less sensitive. In using more complex indicators, it is important to be able to get behind the indicator construction to ensure that its implementation is the same as the author originally intended. The manual should provide this background information.


To read more articles and commentaries from Daryl Guppy, click HERE

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Daryl Guppy, well-known international financial technical analysis expert. Appears regularly on CNBCAsia and is known as "The Chart Man". He is an equity and derivatives trader and author of books including Share Trading, Trend Trading and The 36 Strategies of The Chinese For Financial Traders. He has developed several leading technical indicators used by investors in many markets. His weekly analysis newsletters get favorable comment in Asia and Australia.

Chances of making new highs slimmer

The Malaysian equity market was directionless last week with much lower trading volume. Investors and traders were uncertain about the direction of the market especially when it is overbought. Those who have not bought shares and already have bought shares are wondering whether the bullish trend is going to continue. The benchmark KLCI traded in a very tight trading range between 1,070 and 1,082 points and closed at 1,079.40 points Thursday, almost unchanged on-week and only about 16 points or 1.5% higher on-month.

Negative news outweighs positive news in the market. In Malaysia, unemployment rose to 4.0% in the first quarter of 2009 from 3.1 % in the preceding quarter. The record high in unemployment in the US has sent the Dow Jones Industrial Average 2.63% lower Thursday. Malaysia’s foreign direct investment (FDI) fell sharply with only RM4.2 billion in the first five months of this year as compared to a total of RM46.1bil last year.

On the positive side, the country's overall balance reverted to an inflow of RM3.3 billion in the first quarter of 2009. The worrying inflow of FDI prompted the government to do away with the bumiputera quota for companies wanting to list publicly and increase foreign shareholding in Malaysian companies.

For the past one week, the KLCI was just hovering slightly above the 20-day moving average (20-day SMA). This means that the short term up trend is still being supported. The longer term 90-day moving average (90-SMA) is starting to catch up with the KLCI and this means that the uptrend momentum in the longer term is weakening.

The weakening momentum indication is also supported by momentum indicators like the RSI and MACD indicator which are unable to make new highs after the rebound early last week. Furthermore, trading volume has shrunk 40% to a daily average of 1.0 billion shares as compared to 1.4 billion shares last week. The daily average about a month ago was approximately 2 billion shares.

The KLCI’s inability to test the 1,095 points resistance level after three weeks proves the weakening momentum and the market is therefore bound for a major correction. The Ichimoku Cloud is getting obviously thinner now and this means support is weakening. There is still no indication of a major trend reversal from this indicator at least in the next one month.

Market volatility remains firm in the long term as the Bollinger Bands difference is almost the same as the previous week. The KLCI is trading near the average. The short term volatility has declined significantly, after increasing for a few weeks because of the tight trading range last week. The 3-day Average True Range (ATR) is between 10 to 12 points last week as compared to about 16 points in the previous week.

The chances of the market going above the 1,096 points resistance level is getting slimmer now. The market is finding difficulty to even go above 1,080 points with the current strength. So, for the market to go higher and continue the uptrend, it has to overcome these two resistance levels. Immediate support level is at the pivot low created last week at 1,030 points while a stronger support level is established at 1,000 points. Therefore the KLCI is currently in the middle of the support and resistance level.

Since the market is not going anywhere, it is better to stay out of the market if you do not hold any positions. The worst time to trade is when the price is in the middle of a support and resistance level. If you do have positions, it is better to distribute some from your portfolio because the market is uncertain and the weakening momentum suggests that there is a high change of the market going into a major downward correction.


Daily FCPO chart with volume as at 2 July 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.

Trading the Crude Palm Oil Futures

The price of FCPO made a new pivot low after rebounding to a high of RM2,650 per metric ton early June. Since then the price of FCPO fell 19% in one month. FCPO price tested and broken the support level at RM2,350 before closing at RM2,150 on the 22nd of June. However, it rebounded and closed at RM2,317 on the 26th of June. The FCPO is back in a down trend after enjoying an uptrend since the beginning of this year when it broke the bottom line of the uptrend channel.

The price is now at the long term average price, defined by a 30-week average. The price is also at the 90-day average. The down trend has formed a linear down trend channel (please refer to chart below). The price is currently in the middle of the channel. The down trend is considered strong technically because the momentum indicators like the RSI and MACD are in convergence with the lower pivot lows and pivot highs.

Traders can trade within the down trend channel (See chart below). The top line of the channel which acts as resistance is currently at RM2,450 and declining and the bottom support line is at RM2,100 and declining. Going short at resistance level is preferable because the down trend momentum is stronger. There is no opportunity to trade at current level because the price is in the middle of this down trend channel.

It may be quite difficult to trade at current price when it is at the long term average because price may go sideways. So, it may be able to move into the support and resistance levels of the down trend channel. If the trader trades in this market, a stop loss should not be less than RM80 as the 3-period Average True Range (ATR) is averaging at RM80. For a safer stop, the stop loss should not be less than RM120, which is 1.5 times the ATR.


Daily FCPO 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.

Hong Kong Hang Seng Index (HSI) – Bullish momentum coming to an ease

The strong bullish momentum in the Hong Kong equity market came to an ease last month when HSI only managed to increase 9.5% month-on-month, as compared to 14% month-on-month performance in May. Trading volume was relatively high but declining. Investors continue to wait for any positive news to enter into the market. The HSI climbed early June to test the resistance level of 19,150 points, which I highlighted in my article last month based on a Fibonacci retracement study. The HSI went as high as 19,161.97 points but unable to stay above it and slowly made its way to close at 18,600.26 points end June.


Weekly HSI chart with volume as at 26 June 2009 using NextVIEW Advisor Professional

Like most other markets, technical indicators on the HSI are showing bearish divergences which means that the current up trend is getting weak. Therefore, the HSI may face more pressure to push it higher to the next resistance level. The chances are low that the HSI may break above the current resistance level at 19,150 points but if it does break and stay above this level, it may start to test the next resistance level at 21,400 points. Chances are higher that HSI go into a downward correction with a support level at 16,000 points.

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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.