Market Outlook as at May 4, 2017

On April 11, I posted that FBMKLCI had broken its intermediate uptrend line (here). Fortunately, Morgan Stanley upgraded Malaysian stocks on April 21 (here), and that helped to power up our market until this week.

From Chart 1 below, you can see that the index nearly went above the violated uptrend line, SS. The failure to stay above the uptrend line, SS could lead to 3 possible price directions:
1) A bearish reversal into a downtrend (which I rate as an unlikely scenario)
2) A neutral sideways market (which I rate as a probable scenario)
3) A deceleration of the uptrend market (which I also rate as a probable scenario)


Chart 1: FBMKLCI's daily chart as at May 4, 2017 (Source: Malaysiastock.biz)

Between the 2 probable scenarios, I believe we are likely to see a decelerated uptrend market based on 3-fan uptrend lines (see the re-drawn FBMKLCI chart below). The idea behind the 3-fan uptrend lines is very simple: Markets continuously search for a sustainable uptrend line. Our current bullish market began with a steep uptrend line, S-S1, which was violated in mid-February. After that, the market transitioned into a more gradual uptrend line, S-S2, which was also violated in early April. Since then, the market could have potentially entered into its third uptrend line, S-S3.


Chart 2: FBMKLCI's daily chart as at May 4, 2017 (Source: Malaysiastock.biz)

There are 2 rules to follow:
1) The violated uptrend line shall act as a resistance capping subsequent price rise.
2) There could only be 3-fan uptrend lines; from S-S1 to S-S2 & finally to S-S3. The violation of S-S3, at 1745 would mean the end of the uptrend. There will not be another uptrend line, S-S4.

Hence, it is important that FBMKLCI should stay above S-S3 at 1745.

Note: I am very reluctant to use the 3-fan uptrend lines. The reason being I'm unable to attribute the rules governing this idea to anyone. I remember reading about it in a book a long time ago. Unfortunately I can't remember who's the author (possibly, Murphy) nor can I find it on the internet. I have to highlight this point because its veracity is uncertain. I also don't want anyone to think that I made it up for my convenience. Because it's not illogical, I continue to use it in my technical analysis.