Market Outlookc as at October 11, 2011

Our FBMKLCI broke above the psychological 1400 level & tested its accelerated downtrend line at 1415 this morning. If it can break above this level, it could potentially test the medium-term downtrend line that stretches back to July 11. The resistance posed by this downtrend line is at 1445, which coincides with the strong horizontal line. On weakness, FBMKLCI can find support at the psychological 1400 level or at the short-term uptrend line at 1395. See the chart below.


Chart: FBMKLCI's daily chart as at October 11, 2011 (Source: Quickcharts)

How should we play this rally? It depends on whether this is a bear rally or the beginning of a new upleg. To qualify as a new upleg, you need at least an upside breakout above the 1445 level (preferably the 1450 level). Failure to surpass this level would simply mean that the downtrend is still intact & the market may slide off again. As you know, that’s what we called a bear rally or a corrective move within a bear market.

If you wish to trade now, you should buy either when FBMKLCI breaks the 1415 level or when it pulls back toward 1395-1400. Once you have gone long in the market,you should aim to sell at 1445-1450 (on the assumption that this is a bear rally). If FBMKLCI can break above 1445-1450, you should get back into the market (on the possibility that the market could be entering into a new upleg).

(Note: I have highlighted the word 'possibility' because it is a possible event, not necessarily a probable event.)