Let's revisit 1998

When I was preparing the post entitled "USD weakness, the next worry" yesterday, I was struck by the similarity between the KLCI today & the KLCI in February 1998. If you look at Chart 1, you will see the KLCI has presently broken above its medium-term downtrend line & a wedge formation or pattern has taken shape. All chartists will tell you that this pattern can turn into either a continuation pattern or a reversal pattern. A continuation pattern would mean that the price has broken out of the pattern in the same direction of the prior trend while a reversal pattern would mean that the price has broken out of the pattern in the opposite direction of the prior trend. In the present wedge pattern, a reversal pattern would be at hand if the index breaks above the 940 level while a continuation pattern would be at hand if the index breaks below the 875 level.


Chart 1: KLCI's daily chart as at Feb 11, 2009 (source: Tradesignum.com)

How is the present situation similar to our market in February 1998? Looking at Chart 2, you can see 2 downtrend lines. The accepted downtrend line is SS (the black line). Assuming you are in February 1998, your downtrend line at that point of time would be SS1 (the blue line). You would have thought that the KLCI was trying to breakout of its medium-term downtrend line. A symmetrical triangle was also present and this pattern could turn out to be a reversal pattern (which would be a bullish reading) or a continuation pattern (which would be a bearish reading). Then, it happened. The KLCI broke below the 700-10 level in early April 1998. A continuation pattern was at hand & the KLCI slid all the way until it hit a low of 261 in early September 1998 (when capital control measures were imposed).


Chart 2: KLCI's daily chart from Jan 1997 to Jan 1999 (source: Tradesignum.com)

If you look at the long-term monthly chart (Chart 3), the similarity between the entire market uptrend from 1988 to 1996 (plus the collapse in 1997-8) is very similar to the market uptrend from 1999 to 2007 (plus the ongoing bear market which started in 2008).


Chart 3: KLCI's monthly chart as at Feb 11, 2009 (source: Quickcharts)

The purpose of this post is to point out that our market recovery is still a work-in-progress. We may have seen a temporary bottom. Another leg down may still be ahead. It is important that we must see how the wedge formation will finally pan out. To be sure, we should wait for the monthly MACD to hook up.