Market Outlook going into the Year-End

November 22, 2011

In September, I had posted about the market making a cyclical top (here). The SELL signal that followed is still intact despite a healthy rally in the market for the past 6 weeks. See Chart 1 below.

Chart 1: FBMKLCI's monthly chart as at November 1, 2011 (Source: Quickcharts)

In another post in September, I wrote about how a typical bear market or bull market unfold (here). I postulated that we could be at the initial stage of a bear market decline. At the end of that initial decline, we could see a bear rally. A bear rally is a counter-trend rally within a bear market. That rally kicked in early October. See Chart 2 below.

Chart 2: FBMKLCI's weekly chart as at November 1, 2011 (Source: Quickcharts)

In my blog, I have warned about a possible completion of this bear rally (here). I had compared it with the bear rally in 2008 (from April to May 2008). In the 2008 bear rally, we saw the end of the rally on May 24, 2008 when the following events happened:

• the index broke below 20 & 40-day Simple Moving Average (‘SMA’) lines; and
• the indicators turned negative (such as MACD hooked down, RSI went below its 30-day SMA line & the –DMI cut above the +DMI in the ADX indicator).

See Chart 3 below.

Chart 3: FBMKLCI's daily chart from February to July 2008 (Source: Quickcharts)

On November 18, the FBMKLCI broke below its 20 & 40-day SMA lines and the same list of indicators have turned negative. This means that it is very likely that the bear rally for the past few weeks has ended and the bear market downtrend may continue. See Chart 4 below.

Chart 4: FBMKLCI's daily chart as at November 22, 2011 (Source: Quickcharts)

If you look at Chart 3 closely, you will see that the end of the bear rally in 2008 was followed by a gradual decline. That’s to be expected as the many players were still fairly bullish even after the turn or change-over. Even today, I expect some players will still harbor bullish outlook & they would buy in the market as the lower prices were presented. This group of bullish players would provide the fuel that keeps the slow-burning flame going. In this way, we can expect the market to go down gradually, with occasional rebound that would be capped by the downward sloping 20-day SMA line.

The index would likely to slide & test its immediate support of the horizontal line at 1425-1430 & thereafter the psychological 1400 level. This bearish outlook will only be revised if the index can somehow recover above its recent high at 1493.

Based on the above, the outlook for the market is bearish. You should avoid taking large long position in the market for the next few weeks (or even next few months). If you have large long position in the market currently, you should reduce them accordingly.

(This is my latest article in Merdeka Review. For the Chinese version, go here).