Market Outlook as at October 13, 2011

When the market plummeted in August & September, there were many days when the sellers would hunt for buyers. Whatever the bids- however lower they were- the sellers would accept. That's panic selling.

In the past two weeks, we have been seeing the opposite. Buyers would grab whatever was on offered. There were many days when the bids & offers were far apart & the buyers would jump up to take the sellers. That looks a lot like panic buying to me.

The earlier panic selling arose because of the overwhelming fear in the market that the European Monetary Union could collapse. If that were to happen, the global financial system might seize up & we could see a plunge in the value of many, if not all, financial assets. However, that fear has now subsided and with each passing day, the problem in Europe looks less threatening. Suddenly, everybody woke up & realized that they might have missed the buying opportunity of a life time. Thus, we are now seeing the complete opposite of what we saw in August & September.

There are two things that one must remember in the stock market or any financial market. Firstly, what comes around, goes around (aka history repeats itself). Secondly, we are rewarded in the market for taking risk. In the book "Pit Bull: Lessons from Wall Street's Champion Day Trader", the writer (Martin Schwartz) talked about buying in the market when the condition is so bad that you feel like throwing up. Similarly, he talked about taking profit when others are dancing on the trading floor.

Okay, enough of philosophy! I believe that we are still in a bear rally. I have mentioned earlier that there are two possible outcomes in the market. They are:

1) The bear rally
You may see this rally terminating just below the medium-term downtrend line at 1445. The prior downtrend would continue if the index were to drop below its recent low of 1311 recorded on September 30; and
2) A new upleg
The current rally must first surpass the medium-term downtrend line at 1445 and then a medium-term uptrend must develop. We all know what's the definition of an uptrend- a higher 'high' and a higher 'low'.

The weekly chart shows that FBMKLCI is now poised to test its medium-term downtrend line (Ra-Ra) at 1445. Can it surpass this level? In April 2008, it broke above its medium-term downtrend line (RR) at 1270. I have drawn a triangle over the price movement for both the decline & rebound for Jan-May 2008 & the current one. In the former triangle, we note that the index dropped from a high of 1525 on Jan 18, 2008 to a low of 1157 on Mar 14, 2008, before it rallied to a high of 1305 on May 2, 2008. The ensuing bear rally retraced 40% of the lost ground. The current 'incomplete' triangle would have an initial high of 1597 on Jul 15, 2011 and followed by a recent low of 1311 on Sep 30. If the current rally were to retrace 40% of the lost ground of 286 point, it would terminate at 1425. On the other hand, if it were to retrace 50% of the lost ground, this rally would terminate at 1454. (Note: As at 11.00am, FBMKLCI is at 1443).


Chart: FBMKLCI's weekly chart as at Oct 13, 2011_10.00am (Source: Quickcharts)

Based on the above retracement study & the presence of the strong resistance at 1445-1450, I believe that the traders should start taking some profit in the market today.