For this week, investors look to sell on rally, especially if the index surges towards the January 7 pivot high or even higher
Share prices on Bursa Malaysia rose last week, with most of the week's gains captured on Friday on hopes federal funds will flow again to boost economic growth in Perak following the takeover of the state government by the Barisan Nasional (BN) from Pakatan Rakyat.
Gains were led by banks BCHB, Maybank and Public Bank, with core plantation stocks KL Kepong and Sime Darby lending a hand as crude palm oil prices climbed above the RM1,800 per tonne level.
Bursa Malaysia's exceptional performance last Friday was a total contrast to the performance of regional markets and Wall Street. The takeover of Perak by the BN could have instilled some confidence that it would pave the way for fast implementation of public projects in the state as it is a known fact that public spending has taken a back seat after March last year.
Nevertheless, the 12-point surge in the benchmark Kuala Lumpur Composite Index (KLCI) for the week was not backed by strong volume and suggests that it has been propped up by institutional players picking up counters like Bumiputra Commerce, KL Kepong, Maybank, Public Bank and Sime Darby.
The index is expected to move further upwards to test the psychological resistance at 900 before testing 920. While the performance of the Dow Jones Industrial Average last Friday would provide some support for the upside, anticipation of further positive developments for the BN ahead of the Umno party elections in March will also help lift market momentum.
The Dow surged 217 points or 2.7 per cent to 8280.6 last Friday despite the worse-than-expected non-farm payroll numbers that saw the biggest decline since December 1974 as employers cut headcounts for the third consecutive month by 598,000 people. The New York stock market rallied despite the weak number that came above a consensus estimate of 540,000 people as the dismal figure is expected to prompt the US government to announce more aggressive measures to revive the banking industry, which could include taking up more stakes in them without nationalising them.
Back on the local front, investors are advised to sell into any bear market rally as the situation is expected to turn ugly before recovering. For instance, corporate earnings are expected to take a beating in the current environment and equity valuation could dive further from current levels as more companies report weaker-than-expected earnings in the current fourth quarter 2008 reporting season that will be concluded this month.
Listed companies are expected to take advantage of the current doom and gloom outlook to spring clean their balance sheet by making additional provisions and write-offs. Overall, earnings could contract by 2.7 per cent in 2008 compared to a double-digit growth in the year before.
In the broader economy, consensus is expecting the industrial production, export and import numbers that will be released on Wednesday and Thursday to contract by 10.4 per cent, 8.3 per cent and 11.3 per cent respectively. Weaker-than-expected numbers have the potential to dampen any bear market rally.
The local benchmark Kuala Lumpur Composite Index (KLCI) rose 12.2 points, or 1.38 per cent, week-on-week to close last Friday at 896.64, with daily average trading volume and value improving to 328.5 million shares and RM511.4 million respectively, compared with 265 million shares and RM381.8 million in the previous week.
The local market began trading on Tuesday on a bearish note, dampened by the Fitch currency ratings outlook downgrade on Malaysia. The KLCI dipped to intra-week low of 873.46 in afternoon trade, and extended low-volume consolidation for the next two trading days on increased domestic political uncertainties after the Perak state government was taken over by BN, which sparked protests from Pakatan Rakyat supporters.
Nonetheless, the market staged a belated rally last Friday, as signs pointed towards a successful takeover of the Perak state government by the BN following the Sultan of Perak's decision not to dissolve the state assembly which would have paved the way for fresh elections to determine which political party should decisively rule Perak. Consequently, the index surged to close at the week's high of 896.64.
Among the other indices, the FBM-EMAS Index gained 77.14 points, or 1.3 per cent, to close at 5,871.13 but the FBM-Small Cap Index eased 5.5 points, or 0.1 per cent lower, to settle at 6,590.81 for the week.
A buy signal was triggered at the upper neutral region on the daily slow stochastic indicator for the KLCI following last Friday's sharp rally (Chart 1), but the weekly indicator fell further towards the oversold region. The 14-day Relative Strength Index (RSI) hooked up back above the mid-point with a reading of 55.50 last Friday, while the 14-week RSI loitered below the 40-point level.
Meantime, the daily Moving Average Convergence Divergence (MACD) trigger line has hooked up and look set to cross above the zero mark, while the weekly MACD indicator extended upwards to reinforce a developing uptrend.
The +DI has crossed above the -DI line on the 14-day Directional Movement Index (DMI) trend indicator to trigger a buy signal, but the ADX line dwindles to a low reading of 15.6, implying further extended consolidation due to bearish momentum.
While weekly technical indicators for the KLCI continue to show bearish readings, daily indicators registered significant improvement following last Friday's strong gain. The close above the mid-point of the Bollinger Band on Friday improves upside momentum, with the index likely to extend gains especially if followed by strong buying momentum above the 900 psychological resistance.
Going forward, it could even reach higher towards the upper Bollinger Band, which is just above 920, if the political situation in Perak stabilises. In any case, a rally to revisit the January 7 pivot high of 936.63 will likely attract strong stale bull selling and profit-taking interest.
Meantime, the immediate downside is cushioned near 885, with stronger support available at 865, and then 850. Note that a rising wedge consolidation chart pattern is developing on the daily KLCI chart which should cap upside potential during this bear market rally.
For this week, advocate investors look to sell on rally, especially if the index surges towards the January 7 pivot high or even higher. The best case near-term upside for this bear market rally may be a peak near 946, to fall in line with 10-point increments from the previous two pivot highs of 926 on November 5 last year and 936 of January 7.
The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.