Market Outlook as at February 14, 2011

As noted previously, the uptrend line of FBM-KLCI was violated recently. The operating uptrend line that was recently violated is depicted below as uptrend line 3. Why did I number it uptrend line 3? I did so for the following reasons:

1) it was the third most sustainable uptrend line to-date: and
2) it could be the 3rd fan line within the context of a 3-fan trend line pattern.

Since the current bull rally started in March 2009, 3 sustainable uptrend lines can be seen to have operated. A sustainable uptrend line is one which has provided some support when the price or index is above the line & some resistance when the price or index is below the line.

If we look at uptrend line 1, it was tested 4 times as a support & twice as a resistance. Uptrend line 2 was tested thrice as a support & once as a resistance. Uptrend line 3 was tested 5 times as a support & once as a resistance. I have also drawn a fourth uptrend line which I have denoted as uptrend line 2a, which was tested twice as a support & once as a resistance. Due to its short operating duration, I would treat uptrend line 2a as an aberration and the market was in a sideway trading (with an upside bias) for the 8 months' period from October 2009 to May 2010.

Based on the above observations, I believe the market will attempt to rise above uptrend line 3. I do not believe it will succeed in doing so. As such, one should sell into the current rebound, especially if FBM-KLCI were to come close to the 1550-1560 level. Thereafter, the market is likely to go sideway for the next few months until it can find another sustainable uptrend line. This is my base case scenario for the market.


Chart: FBM-KLCI's daily chart as at Feb 14, 2011 (Source: Tradesignum)

I can think of the bullish case scenario where the market would rally after a short consolidation, similar to uptrend line 2. I can also think of the bearish case scenario for the market. As noted, the FBM-KLCI has broken the 3rd fan trend line. This points to a bearish outlook for the market. Could this be a temporary top where we would see many weeks of lower prices or could it be something more serious- a cyclical top where we would see many months of lower prices? We will have to wait & see.