Market Outlook as at July 16, 2009

The KLCI followed through with its yesterday breakout above its short-term downtrend line with a break above its recent high of 1096 and the psychological level of 1100 this morning. The KLCI is likely to continue with its prior uptrend, with strong resistance at 1140-1160. While this resistance level looks very near, I think the market will have a tough time cracking it. If we can do so, then the KLCI's next strong resistance would be 1285-1300. The latter looks unattainable at this stage but I have fit it in as the third & final target for this bull rally. This is because a bull rally normally has 3 impulsive waves & 2 corrective waves, according to the Elliot Wave theory.


Chart: KLCI's weekly chart as at July 16, 2009_11.30am (Source: Quickchart)

The above represents my preferred scenario for the KLCI. Despite having a cautiously optimistic stance, I am not totally unmoved by the recent bout of negative news flow. I have shared this with the readers earlier. For the purpose of completeness, I would also like to share my fear for the market. My negative scenario is that the market has turned up so abruptly due to a sudden surge of buying. What motivated this strong buying? Could it be better financial results from the 2nd quarter? I am not sure. Whatever it may be, this buying has overturned the bearish outlook of the market. The most recent instance of a sudden change in a market that appeared to be heading towards a correction was in the 4th quarter of 2007. I have highlighted that leg of the rally in pink (denoted as 'A'). You can see that the MACD & Williams %R were poised to go lower or to give a negative signal (which did not come). The KLCI suddenly zoomed up to make an all-time high of 1524. The sharp run-up was followed by a sharp correction. I am not suggesting a repeat of this scenario currently, but merely to point out that a sudden strong rally has its danger. There could be good reasons or grounds for this rally, but at this moment most of us are more than a bit puzzled. If sharp correction happened, the KLCI can expect good support at the psychological 1100 level as well as the horizontal line support of 1090-95.