Market Outlook as at Nov 9, 2010

FBM-KLCI tested its all-time high at 1524 this morning. Not surprisingly, it failed to break above this level on the first attempt. The market could correct for a few hours or a few days before mounting another attempt. See the weekly charts, Chart 1 below.


Chart 1: FBM-KLCI's weekly chart as at Nov 9, 2010_11.30am (Source: Quickcharts)

The daily chart, Chart 2 shows the strong rally in FBM-KLCI over the past 5 months. You may notice the bearish divergence in the MACD over the past 6 weeks. Could this be a sign of a protracted correction to come?


Chart 2: FBM-KLCI's daily chart as at Nov 9, 2010_12.00pm (Source: Quickcharts)

I have appended below the daily chart for the previous market top in January 2008. The rally from August 2007 reached its pinnacle in early January 2008. You may notice a similar bearish divergence in the MACD indicator in October to November 2007. This bearish divergence was nullified by the strong rally in December 2007. So, a bearish divergence in the MACD indicator is not a guarantee that the market will not go higher. We must bear this in mind in the current situation.


Chart 3: FBM-KLCI's daily chart from July 2007 to June 2008 (Source: Quickcharts)

However, a re-test of market extremes (either the low or the high) tends to bring out the wrong reaction by market players. Nobody wants to be the last one to get into the market in the case of a retest of the market peak nor does anyone want to be the last one to get out of the market in the case of a retest of the market bottom. These tendencies lead to market players buying into the market as the previous peak is approaching or vice versa. Similarly, an upside breakout above the previous peak can bring forward a deluge of buying or vice versa. As such a test of a market extreme or a break of this extreme can be achieved due to the herding mentality of market players. The appropriate action is to sell at the resistance or to buy at the support. And, the previous market peak is a very strong resistance while the previous market bottom is a very strong support. If you need a reminder, just look at the chart below.


Chart 4: FBM-KLCI's monthly chart as at Nov 1, 2010 (Source: Tradesignum)

Be careful out there!