KLCI due for consolidation this week

Published: 2009/06/01

The anticipated consolidation this week will be ideal for sidelined investors who missed the boat to begin accumulating positions for the next market upmove

Profit-taking and month-end tussle between the bulls and bears ahead of futures contract expiry, with downside bias greased by the larger-than-expected first quarter GDP contraction and slowing buying momentum forced the blue-chip benchmark Kuala Lumpur Composite Index (KLCI) to retreat from a new eight-month high to close flat last week.Week-on-week, the KLCI erased 1.15 points, or 0.1 per cent to settle at 1,044.11, as last-minute gains on Friday in Tenaga (+3.94 points), Sime Darby (+3.28) and Genting Bhd (+1.68) offset Telekom's (-7.42) heavy losses following its huge capital repayment.

Average daily trading volume and value slowed marginally to 1.58 billion shares worth RM1.61billion respectively, compared with the 1.6 billion shares and RM1.55 billion average the previous week.

Last week, the weaker than expected Q1 2009 GDP contraction of 6.2 per cent was an unpleasant surprise but buying interest was strong to absorb the initial negative reaction on Thursday. The KLCI recovered sharply on Friday as it reacted positively to external news like Japan's faster-than-expected 5.2 per cent month-on-month surge in industrial output for April, further signs of economic recovery in China that was reflected in higher FDI inflows and upward revisions in consensus GDP forecast and India's higher than expected GDP growth of 5.8 per cent.

Short covering interest as the month draws the curtain also helped the benchmark index to regain some lost ground.

To claim that interest in the market this week will be subdued due to school holidays is too simplistic but that's the reality based on past track records. Nonetheless, the week is not without interesting news. The outcome of the Penanti by-election may not have any impact on the market after Barisan Nasional withdrew from the contest.

Nonetheless, it may have a long-lasting political implication for BN if the incumbent party loses to one popular independent candidate but a resounding victory for the opposition may only signify growing grassroot support for the party and raise worries about political uncertainty in the future.

Malaysia's trade numbers for April will be released this Thursday. Consensus expectation is pointing towards 22 per cent and 28 per cent contractions in exports and imports respectively. Foreign reserve numbers that will be released the following day could provide some clue on the flow of foreign funds. So far this year, foreign participation in the market has been strong in February and March before easing in April.

The weakening of the US dollar is a boon to emerging markets and Malaysia should benefit if investors that dump dollar-denominated assets start looking at commodity-related exposures as crude oil price rises.

With Japan, China and India showings signs of economic recovery, the US crude inventories declining 5.41 million barrels to 363.1million and Opec maintaining its output quota at 24.8 million barrels per day, interest in oil and gas stocks should pick up this week. With some substitution effect, plantation counters should benefit as well.

Technical Outlook
Spot month May KLCI futures contract traded on Bursa Malaysia Derivatives Berhad expired at 1,055, up 7 points, or 0.7 per cent for the week, improving to a 10.9-point premium to the cash index, compared with the 2.7-point premium the previous week. Meanwhile, next spot month June futures contract surged 19 points on Friday to end at 1,056.5 for a wider 12.4-point premium, reflecting a more bullish outlook for next month.

Bursa Malaysia shares extended recovery last Monday, supported by keen buying interest in gaming stocks and construction-related lower liners on speculation that long pending major infrastructure projects will be revived soon.

However, weak regional markets and buying momentum encouraged profit-taking and forced buyers to the sidelines the next day.

On Wednesday, the local stock market extended profit-taking consolidation, ignoring sharp rallies in the region as the large price adjustment in TM shares after its capital repayment exercise and selling pressure on Genting Bhd and Resorts World greased downside. The correction followed through the next day but on lower volume close to the one billion shares mark after the government reported a Q1 GDP contraction, forcing the index down to the important 1,037 immediate support before bouncing back up.

However, the benchmark staged a strong rebound last Friday, helped mostly by strong gains on Sime Darby, Tenaga and KNM Group as a battle between the bulls and bears ahead of futures contract expiry lifted the index significantly off lows. The KLCI peaked at another fresh eight-month high of 1,059.88 early Wednesday and dipped subsequently to a low of 1,036.12 by Friday morning for a narrower 23.76-point trading range for last week.

Week-on-week, the FBM-EMAS Index was up 13.89 points, or 0.2 per cent to close at 6,984.21, while the FBM-Small Cap Index (SCI) was stronger with a gain of 155.2 points, or 1.8 per cent to 8,717.26.

The daily slow stochastics indicator for KLCI is now deep in the neutral region following last week's correction, while the weekly indicator has eased lower to signal less overbought momentum. The 14-day Relative Strength Index (RSI) has re-hooked upwards for a positive neutral reading of 67.36, while the 14-week RSI levelled for a reading of 66.15.

On the other hand, the daily Moving Average Convergence Divergence (MACD) trend indicator expanded negatively against the signal line to suggest weaker uptrend in the immediate term, but the weekly MACD signal line continue to expand higher albeit on a less gradient. Meantime, the +DI and -DI lines on the 14-day Directional Movement Index (DMI) trend indicator has expanded positively, with the ADX line stable with a bullish reading of 39.9.
Conclusion

Save for the weekly slow stochastics and daily MACD indicators for KLCI which signal further weakness ahead, other technical momentum and trend indicators have been adequately neutralised to pave the way for uptrend resumption going forward. Nonetheless, with the school holidays beginning this week and extending to next week, expect buying momentum to slow as most investors and market players could be taking their families away for well-deserved holidays.

However, the anticipated consolidation this week will be ideal for sidelined investors who missed the boat to begin accumulating positions for the next market up-move. Top preference remains the oil and gas sector, with stocks such as KNM, Perisai Petroleum, Petra Perdana, SapuraCrest, Scomi Group, Dialog and Kencana, likely to outperform the broader market in the medium term, given the resilient crude oil price which has appreciated above the US$65-a-barrel level.

On the KLCI, important immediate downside cushions are at 1,037, which represent the May 7 pivot high and the 38.2 per cent Fibonacci Retracement (FR) of the upswing from 1,000.34 pivot low of May 18 to the recent peak of 1,059.88 of May 27, next at 1,030 (50 per cent FR), then 1,023 (61.8 per cent FR). On the flipside, a decisive breakout above last week's high of 1,060 will extend gains to next significant resistance from 1,064, the previous support floor in August last year, with next target at 1,078, representing the 38.2 per cent FR of the collapse from the all-time high of 1,525 to the pivot low of 801. Going forward, the 1,100 level will be the next formidable upside hurdle.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell