Kuala Lumpur Composite Index (FBMKLCI): Breakout may happen this week

The Malaysian equity market continues to be uncertain despite better than expected GDP contraction for the second quarter. However, the market continues to be supported well. The FBMKLCI closed at the high of the day at 1,176.90 points Thursday, edging up 13.47 points or 1.12% from the previous week. Trading range for the past 5 days was very tight between 1,162.41and 1,176.90 points. Average daily trading volume shrunk considerably to 720 million shares. The daily average for the past few weeks was about 1.1 billion shares, so there is a 30% decline in volume.

The 3.9% year-on-year contraction of the economy in the second quarter was an improvement from the y-o-y 6.2% decline in the first quarter. It was also better than economists’ estimates at 5%. On a sequential quarter basis, that is from the first quarter to the second quarter the economy grew by 4.8% non-seasonally adjusted and non-annualized. For the first six months of this year, the Malaysian economy shrank by 5.1%. However, the three consecutive contractions confirm that the Malaysia is in a recession.

The market has been in a correction for a month after a strong uptrend formed since March this year and this uptrend is currently well intact. The short to long term 30 to 60-day moving averages are still increasing strongly and the benchmark index is still in the uptrend channel. The FBMKLCI has been hovering just above the short term 30-day moving average the whole of last week. The 90-day moving average which provides long term support is currently at 1,091. The intermediate uptrend channel support level is at 1,155 points.

Momentum indicators continue to be neutral but the Relative Strength Index (RSI) indicator has been increasing last week from 50 to 60, showing some improvement in the uptrend momentum in the short term. The other indicators, MACD and Momentum continue to show that the uptrend momentum is weak. The declining ADX indicator also shows that the uptrend is still weak but the expanding PDI and MDI indicators, like the RSI are showing short term improvement.

The 20-day Bollinger Bands gets even tighter now after the market traded in a very narrow range last week. A tighter band would normally result a bigger explosion in price. The last time the Bollinger bands become this narrow was in mid-July this year when the FBMKLCI exploded upwards. The short term volatility maintains the same as last week. The 3-day Average True Range (ATR) remains below 10 points which means that there is no strong movement last week that may cause price to move into a direction.

With the bulls still supporting the current trend and the thickening Ichimoku Cloud indicator showing no signs of a bearish reversal at least in the next one month, the chances of the equity market moving higher is brighter. However, a breakout of the immediate support or resistance level will be a better determining factor to the future direction. The index is expected to move deeper into a downward correction it the support level is broken and climb higher if the resistance is broken.

Immediate support level remains at 1,160 points and if this is broken with expanding Bollinger Bands it may test the next support level at 1,100 points. Immediate resistance level is at 1,200 points and if the FBMKLCI can go higher and stay above this level, the uptrend is expected to continue to the next resistance level at 1,300 points. Last week I mentioned that the breakout is going to be soon because of the narrow Bollinger Bands and this time, the breakout may happen this week.


Daily KLCI chart as at 27 August 2009 using NextVIEW Advisor

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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.