Market Outlook as at August 18, 2011

I have received many queries asking whether this is a good time to buy stocks. Some are worried that they have missed the buying opportunity during the recent selldown. Conversely, I have received many calls from clients who are looking to sell at higher prices. The first group is hoping the market would ease off, so that they can buy. The second group is hoping that the market would go higher, so that they can sell. Where is our market now, depends on the seer. We have reached a point where some would say the glass is half empty, while others would say the glass is half full.

In my opinion, the market has sustained enormous damage over the past 2 weeks. It is highly likely that the bull market has ended. I arrived at this conclusion after studying the weekly chart (Chart 1) and noted the following:

1) the index is below the 40-week SMA line (or, the 200-day SMA line)
2) the 10-week SMA line has cut below the 20-week SMA line
3) the MACD indicator is poised to enter into the negative territory
4) -DMI has crossed above +DMI, while the ADX which had dropped below the 20 mark at the end of July, is now rising. The action of the ADX signaled two things; earlier, the weakening of the prior uptrend and later the possible changeover to a downtrend.

Chart 1: FBM-KLCI's weekly chart as at August 18, 2011_12.30pm (Source: Quickcharts)

I have also appended the monthly chart below, which shows the negative crossover in the MACD & RSI indicators. The -DMI is also poised to cut above the +DMI.


Chart 2: FBM-KLCI's monthly chart as at August 18, 2011_12.30pm (Source: Quickcharts)

Finally, you may like to look through the charts of other global markets. A place to start if Yahoo Finance or my earlier post. Click on the individual link for each index and shorten the duration of the chart to 1 or 2 year(s). The shortening of the chart duration will give you a clearer picture. You will see that almost all the markets listed in that post have broken, not only the 200-day SMA line but also the 400-day SMA line. A fall of that magnitude will obviously lead to a decent rebound, which we have seen in the past few days. The question is whether this is a dead cat bound or something a bit more (maybe, a bear rally) or an buying opportunity (with the continuation of the prior uptrend further down the road). Based on my earlier observations, I believe we have entered a bear market and we are currently in the first rally within the bear market (thus known as a bear rally).