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.