FBMKLCI: Bulls awaken from a one month slumber

Selected blue chips rally continue to push the FBMKLCI to a new year high last month. The benchmark index was able to test the 1,200 points resistance level while other regional markets have not yet created a new year high. The optimism in the market was generally led by news reporting increasing business activities and continuous improvement in the local and global economy. The FBMKLI closed at 1,201.28 points Thursday, 27.62 points or 2.35% higher from the previous week. Market volume has only increased marginally last week. The average daily trading volume was 702.41 million shares as compared to 616 million shares in the previous week.

The confidence in the market was also led by massive liquidity from the government stimulus package and the fund raising activity by government investment arm which was oversubscribed. The upcoming tabling of the national budget this month was expected to focus on bringing the economy back to growth. There is a concern however about the weakening US dollar which may slow down imports from the world’s biggest economy. However, growth in China may support economies in the Asian region.

The weakening US dollar has caused price of commodities to increase. The price of crude oil is above US$70 a barrel. Crude oil has been trading around US$70 since June. Price of gold has also increased and trading at about US$1,000 an ounce in the past one week, the highest since February this year. Malaysian crude palm oil however has declined from RM2,500 per metric ton last month to RM2,179 Wednesday. Price of crude palm oil is expected to increase because it is technically oversold.

Last month, I mentioned that the bulls were back in July and the index has a high chance of moving higher. The index continues to be dominated by the bull and resumed the uptrend which is generally strong. The strong bullish momentum indication last month has pushed the FBMKLCI higher from hovering around the short term 30-day average. The 30-day average is currently at 1,178 points while the longer term 90-day average is way below at 1,107 points. The index is now 43% higher from the low in March this year.

Momentum indicators started to agree each other now. Most of the momentum indicators were indicating strong bullish momentum except for the ADX and MACD indicators in the previous month. This time, these indicators are also showing strong bullish momentum. The MACD indicator started to become higher than its moving average after being below it for one month. The same goes for the ADX indicator. The divergence between the short and long term moving averages also confirms the strong bullish momentum

There is a breakout in volatility on the upside. The Bollinger Bands which were contracting since early August has started to expand. The FBMKLCI is now trading at the top band of this indicator and this indicates strong bullish momentum. The weekly average volatility however, remains firm with the 3-day Average True Range at 11 points, higher than the previous week’s average trading range of 6 points. The market is currently moving out of its correction with a steady move.

The strong bullish momentum and volatility breakout confirms a breakout of the market correction and a rally is expected. The FBMKLCI is currently above the 1,200 points resistance and the market is expected to make newer highs for this year. Resistance level is currently between 1,280 and 1,300 points. The leading Ichimoku Cloud is still wide and rising which means that the uptrend is being supported very well. Being a leading indicator, this indicator also shows that there are no signs of a bearish reversal in the next one month.


Daily FBMKLCI chart as at 10 September 2009 using NextVIEW Advisor

Opportunities arise as the bulls awaken from a one month slumber. The market is generally expected to rise in the short term. The low volume indicates the market is not in full force yet. The FBMKLCI is expected to rally upwards to the next resistance level at 1,300 points, provided that it is able to stay above the underlying up trend support level, which is currently at 1,160 points.

The opportunity should be a short term one because the correction that the market has gone through was a short and small one. Risk is high if trading and holding for long term as prices are above the averages. If you want to accumulate long term, then look for stocks that are trading below the average price (A 200 day moving average can be used as a yardstick).

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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.