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.