Chart: FBMKLCI's daily chart as at Sept 19, 2011_2.35pm (Source: Quickcharts)
A reader wrote to me about my column in Merdeka Review last week. The article is in Chinese and he can't read Chinese and neither can I. I wrote it in English & they translated it for me. The point therein is not new, if you have been following this blog. For his benefit (& possibly yours), I have posted the English version below.
Market made a cyclical top
Last week, we talked about an early warning system of a potential market top. A few weeks after the early warning flashed, the index dropped more than 100 points to a close of 1469 last Friday. Now, we have to address the question of whether we have made a cyclical top or a temporary top. Let’s examine Chart 1 below.
We can see the index has broken below the 10-month Simple Moving Average (‘10-month SMA’) line and the 7-month Weighted Moving Average line has cut below the 10-month SMA line. Trend followers like to overlaid a security or an index with 1, 2 or 3 moving average lines which can function as support lines (in place of straight trend lines which are drawn by the chart user) as will as using the crossing of these lines as a trigger for a BUY or SELL on the security or the index. The last time we witnessed our index going below the 10-month SMA line as well as the crossing of the 10-month SMA line by the 7-month WMA line was in March 2008, when our market made a cyclical top.
In addition, you would note 2 negative readings among the indicators:
1) The MACD indicator plots the MACD line, which is derived from the difference between the 12 & 26-period Exponential Moving Averages (‘EMA’), and the 9-day EMA line, has shown a negative crossover; and
2) The RSI has dropped below its 30-month EMA line.
The last time these 2 indicators flashed the same signal was again in March 2008 when our market last achieved a top.
The only indicator which has not flagged a warning is the ADX indicator. ADX, which indicates the strength of the current market trend, will flash once the trend is clear. For a monthly chart, that would come later. The thing to look out for is the –DMI crossing above the +DMI and the ADX (the dotted line) curving upwards. When these are sighted, the downtrend would be unmistakable. Alas, the prices would be substantial lower than today.
Chart: FBMKLCI’s monthly chart as at Sept 12, 2011 (Source: Quickcharts)
From the above, I believe the market has made a cyclical top & is likely to drop further or at the very least, drift in listless trading in the weeks ahead. Having said that, the market is currently at the stage where some investors are nibbling stocks which had dropped to the desired prices. This is not unusual as investors tend to buy into any correction or consolidation, guided by the belief that the market will recover & go higher (after correction or consolidation). These investors would point to the sharp sell-down in the past, such as in March 2007 & August 2007 as examples of buying opportunity after a sell-off. However, I believe we are more likely to be at a similar stage as March-May 2008 where some buying support held up the market & even caused the index to stage a decent rebound. That rebound soon frizzled out & the market continued its decline in June 2008. Among technical analysts, the April-May 2008 rebound is known as a bear rally.
The big question to ask is whether the European financial turmoil would blow up over the next few weeks & if so, how it would impact global equity markets, including Malaysia. Until these questions are resolved satisfactorily, our market will be in a holding position- neither retreating nor gaining ground- with support at 1442-1443 & resistance at 1480-1483. See Chart 2 below. A breakout in either direction would point the way forward for our market.
Chart 2: FBMKLCI’s daily chart as at Sept 12, 2011 (Source: Quickcharts)
3 comments:
agree, people like to buy on discount despite the bad sentiment The effect is price may still go down with the many more investors of similar thinking. One of the main reasons is the attractiveness of discount. Who wouldn't want to buy at a cheaper price? Investing bit by bit is okay but never buy low and sell lower. Judging from the high volume from each day , I don't doubt if many losers actually lost money. They just bet low and panic sell when they couldn't take it.
The best strategy here is to snipe the bear when it reaches its bottom. I think traders should hold onto the cash and observe the losers finish their job before investing. If this is truely a perfect bear, then the best strategy is to snipe the bear when the market falls for about 50%. Since the index has fallen up to 10%, we only need to countdown another 40% I guess. Recession usually takes about one year to wipe off those bearish sentiment. So I personally believe that the best time to invest is in midyear next year or 2012. It is okay for me to wait, but I cant't make any money from either long or short during bear market, which makes me feel impatient for a reversal.
Hi Alex,
How you see Mahsing near term technical outlook?
Hi Cheeseong,
Mahsing has tested at its intermediate uptrend line support at RM1.80. If this can hold, then the stock may slowly recover. If not, its long-term uptrend line support is at RM1.65-1.70.
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