Market Outlook as at July 30, 2009

Our market is finally taking a break after charging upward for about 11 days from July 14 to July 28. I expect the KLCI find support at the 20-day SMA line, presently at 1124. If this support failed, the KLCI may test the horizontal line support st 1100 or the 50-day SMA line (presently at 1083) or the medium-term uptrend line (presently at 1090).


Chart 1: KLCI's daily chart as at July 29, 2009 (Source: Quickchart)

While watching our market, we must also keep an eye on DJIA. Interestingly, DJIA appears to be forming an expanding triangle or one half of a diamond formation. See the chart below.


Chart 2: DJIA's daily chart as at 29/7/2009 (Source: Stockcharts.com)

An expanding triangle is the reverse of a normal triangle where two lines converge towards a point ahead, called the apex. In the case of an expanding triangle, the two lines diverge away from each other. The psychology of the players in a market trapped in a normal triangle is one where the bulls & the bears slowly moved towards an agreement on the price while in the case of an expanding triangle, the players' price perception is drawing far & far apart. Here, the bulls are getting more bullish and the bears are getting more bearish. Like a normal triangle, a breakout to the upside of an expanding triangle will be bullish for the market, or vice versa. For a bearish look of a expanding triangle, go here.

Alternatively, what we are seeing in DJIA is the left-hand half of a diamond formation, with the right-hand half still absent. While the left-hand half looks like an expanding triangle, the right-hand half will look like a normal triangle. When we finally see the shape of a diamond formation, we will await a breakout either to the upside or the downside. There is a tendency for diamond formations to be formed at the market top. For now, we shall adopt a neutral stance & await the pattern being formed & its subsequent resolution. For a bearish look of a diamond top, go here.