Market Outlook as at May 14, 2008

Over the last few days, some speculative stocks had enjoyed increased volume, with or without price movement. Those, which had enjoyed sharp price movement, had increased volume prior to the price increase. While the overall market is still not favorable, as reflected the persistent outnumbering of gainers by losers and very low volume traded, the increased activity among the speculative stocks could be signaling that the market might enjoy some bullish activities in the days ahead.

The KLCI broke above its medium-term downtrend line in mid-April. One can see a short-term uptrend line, which underpinned the subsequent recovery in the index. Nevertheless, we can see that the daily MACD indicator has already hooked down and the Williams %R indicator is struggling to stay above the 50% level (see Chart 1).


Chart 1: KLCI's daily chart as at May 13, 2008 (courtesy of Quickcharts)

Now, let's look at the bigger picture, i.e. the weekly & monthly charts. The weekly chart (Chart 2) shows that the KLCI had broken below its long-term uptrend line in March. In the current rebound, the index has tested the uptrend line in end-April & early-May at the 1300-1305 level, but failed to recover above it. While the weekly MACD indicator has just hooked up (a positive sign), the Williams %R indicator is still below the 50% level.


Chart 2: KLCI's weekly chart as at May 13, 2008 (courtesy of Quickcharts)

As noted in February (go here), the KLCI turned bearish when the monthly MACD indicator hooked down. The monthly MACD indicator is not likely to hook up in the next 2 or 3 months. The Williams %R indicator has gone below the 50% level (currently at the 40% level), probably signaling further weakness in the index.


Chart 3: KLCI's monthly chart as at May 13, 2008 (courtesy of Quickcharts)

With the above observation of possible bullish market activities ahead, should one be buying? I believe that there are still a lot of very attractive stocks out there, whether for short-term trade or for long-term investment.

Some analysts believe that the current market rally is just a bear rally. They opined that one should sell into this rally because the market might drop again. I am not sure whether we are in a bear rally or otherwise. My calls on stocks are based on technical breakouts & attractive valuation. Nevertheless, I do believe that if the KLCI were to reach a level of 1330-1340, you should reduce your position in the market. A 50% retracement of the recent fall from the high of 1525 (on January 15th) to the low of 1157 (on March 10th) would place the KLCI at the 1341 level. This level coincides with a very strong horizontal resistance level.