FBMKLCI may move higher this week

The market went into a profit taking mode after the tabling of the National Budget in the previous Friday which most investors see as moderate and balanced for the economy but little for the equity market. The equity market pulled back last week after the benchmark FBMKLCI failed to extend gains after three consecutive weeks of increase with a lower trading volume of 945 million shares averagely on a daily basis. The FBMKLCI closed at 1,241.75 points after rebounding from the intraday low of 1,236.20 points on Thursday. The FBMKLCI fell 18.27 points or 1.4% from last week. The decline was also in line with the correction in global markets.

The Malaysia 2010 Budget has 3 focuses: (i) driving Malaysia towards a high-income economy, (ii) ensuring a holistic and sustainable development and (III) focusing on the well being of the Rakyat. Malaysia economy is forecast to grow by 2%-3% in 2010 and estimated to contract by 3% this year. This was announced in the 2010 Budget tabled by Prime Minister that revealed a 5.6% deficit budget. The Government plans to overhaul its tax revenue and subsidies following the weaker economy and lower income from petroleum. Many believed that it is the final stage of completing the study on the implementation of the goods and services tax (GST).

The US market rebounded sharply Thursday after a better-than-expected third quarter GDP reading. GDP increased sharply to an annualized growth rate of 3.5%. GDP was expected to increase 3.2% after contracting 0.7% in the second quarter. The data shows that the US economy is recovering well and boosted investors confidence. The US dollar has rebounded sharply in the past two weeks against major world currencies. The green back has also risen against the Malaysian ringgit from RM3.33 to a US dollar in early October to RM3.40 to a US dollar.

The upward rally of commodities prices started to halt as the US dollar strengthens. Price of gold found resistance after trading at about US$1,065 an ounce in the futures market in COMEX. It is currently trading at US$1047. Price of oil has also been struggling to increase after hitting a high of US$82 a barrel and is now trading slightly below US$80 in NYMEX. Price of rubber in TOCOM still trades above JPY230 a kg after rallying from JPY200 last month. In Bursa Malaysia, crude palm oil futures pulled back to RM2,195 after climbing to a high of RM2,250 in the previous week.

The FBMKLCI pulled back to the 30-day moving average which has so far provided quite good support to the current up trend. The rebound from Thursday shows that the benchmark index is still being supported at this average. The RSI and Price Momentum trend strength indicators are at the equilibrium and this indicates the pull back is not pressured by selling forces yet. However, the MACD has just crossed below its moving average but at a higher level. The current uptrend is expected to stay intact until these momentum indicators start to decline further.

Daily volatility in the market has slightly increased in the pull back with the Average True Range (ATR) reading increased from 8.5 points to 10 points. Therefore, the pullback is not a strong selling pressure as the average daily volatility should increase 2-fold to indicate strong movement. The FBMKLCI moved towards the middle band (20-day moving average) of the Bollinger Bands, causing the top and bottom bands to contract. This indicates a correction in the FBMKLCI.


Daily FBMKLCI chart as at 29 October 2009 using NextVIEW Advisor

The decline last week has not confirmed a trend reversal as the indicators are still supporting the uptrend. The bullish reversal pattern on Thursday FBMKLCI chart indicates that the market may rebound from the current low. Therefore the benchmark index may move higher this week and has a high chance of testing the high of 1,270 points this week or next week. Failing to test this high means that the market resistance is strong and further downward correction may happen especially if it breaks the immediate support level. Immediate support level is at 1,236 points while a stronger support level at 1,200 points. Major resistance level remains between 1,280 and 1,300 points. Therefore, potential upside is less and traders should strategize themselves to take fast and small profits should they trade in the equity market this week.

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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.