Look for buying opportunities on dips oil & gas-related stocks such as SapuraCrest, Scomi Group, Dialog, Kencana and SAAG, says a research head

The buoyant sentiment on external stock markets last week, especially on Wall Street after more US blue-chip companies reported better-than-expected profits for the second quarter, spilled over to the local market to fuel a bullish breakout on the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) for it to close at an 11-month high.For the week the FBM KLCI surged 53.14 points, or 5 per cent to settle at 1,120.90.

Strong gains in BCHB (+8.92 points for the FBM KLCI), Public Bank (+8.8), Maybank (+7.94) and Axiata (+7.58) contributed to more than two-thirds to the index's gain. Average daily trading volume and value ballooned to 1.06 billion shares worth RM1.46 billion, compared with 680.2 million shares worth RM1 billion in the previous week.

The local market was imbued with positive sentiments from the external and the domestic fronts last week that helped it chart a new high for the year. The earnings reporting season in the US in particular was a big catalyst as 30 out of 38 S&P 500 companies that have reported earnings so far beat estimates, adding support to economic data such as falling claims for unemployment benefits, higher-than-expected retail sales and narrower contraction in industrial production.

Hopes are building up that rising corporate profits will help curtail the rising unemployment and contribute positively to the labour market. Singapore's and China's better-than-expected export and gross domestic product numbers respectively contributed to the positive vibes in the Asian markets as well.

We also witnessed the sudden revival of interest in the crude oil refinery and tankage facilities in Yan, Kedah, and success in obtaining funding from interested foreign parties that will acquire a sizeable stake in the venture.

The speed of execution and continuous news flows pertaining to these ventures were astounding. Such news flows will be the order of the day in future as similar plans have been mooted in Manjung, Perak, and feasibility studies are been carried out for such ventures in Malacca.

These developments could pave way for the revival of the Trans Peninsula Pipeline as well as the puzzle would not be completed if there is a more economical and safer way to transport bulk of the 12 million barrels of crude oil that pass through the Straits of Malacca to East Asia on a daily basis.

So, interest in black gold and investments in upstream and downstream activities will continue to provide wide-ranging opportunities for service providers in the industry, which are still trading at big discount to market's 2010 price-to-earnings ratio (9x against the FBM KLCI's 14x).

Maintain an overweight stance on the sector.The broader index may enter into a short consolidation phase later this week after the sharp rise last week as it waits for direction, particularly from the US.

The US will release the June data for leading indicators today, which is expected to rise by 0.5 per cent, an increase for a third consecutive month. Surveys done on existing home sales and University of Michigan Confidence Index are pointing towards further improvement in the economic indicators.

Meanwhile, big corporations like Apple Inc, Coca-Cola Co and McDonald's Corp will release their quarterly earnings this week that will shed some light on consumption strength. Locally, the inflation number will be released on Wednesday.

Consensus forecast is pointing towards a contraction of 1.5 per cent and this will not lead to worries about deflation. The contraction is hardly surprising considering the 41 per cent increase in pump prices in June last year when oil prices rose above US$140 per barrel and the following seven consecutive price cuts until December 2008.

Come September fuel prices will be adjusted upwards again as RON 92 gives way to RON 95. Nonetheless, the signs of moderation in the headline inflation rate is pointing towards a full-year expansion of 1 per cent and is supportive of extension or further loosening in Bank Negara Malaysia's monetary policy, which will be made known on July 29.

Technical outlookSharp corrections in regional markets last Monday spilled over to dampen the local stock market and forced lower liners lower. Consequently, the FBM KLCI fell to a low of 1,060.96 on negative market breadth albeit on lacklustre trade.

However, the market broke out from consolidation on higher volume the next day, fuelled by hopes US financial companies will report better second-quarter earnings.Global stocks rallied on Wednesday, sparked by a bullish sales forecast from Intel Corp, filtering through to the local market to trigger a bullish breakout to fresh 11-month highs.

The next day saw strong follow-through buying momentum with trading volume expanding towards the 1.7-billion-share mark, suggesting more upside in store. Profit-taking ahead of the weekend checked gains in blue chips, but the index managed to chart an 11-month high of 1,121.66, the highest level seen since August 12 last year.

The daily slow stochastics indicator for the FBM KLCI climbed deeper into the overbought region (Chart 1), but the weekly indicator has turned up a bit to signal lessening downward momentum.

The 14-day Relative Strength Index (RSI) has also climbed into the overbought zone with a reading of 75.31 as of last Friday, while the 14-week RSI has a reading of 70.49.Meanwhile, the daily Moving Average Convergence Divergence (MACD) trend indicator expanded upwards following a buy signal early last week, while the weekly MACD re-hooked upwards to signal bullish continuation (Chart 2).

The 14-day Directional Movement Index (DMI) trend indicator displayed a stronger trend reading with the ADX level rising back up for a reading at 21.93. ConclusionDespite short-term overbought momentum for the FBM KLCI signalling profit-taking correction will be forthcoming, the more bullish readings on trend indicators suggest that any profit-taking dips should be shallow as market undertone has turned positive.

Also note that the FBM KLCI has staged a decisive bullish breakout for a close above the 200-week SMA which is at 1,098, signalling further significant upside potential in the medium term.

Nonetheless, continue to recommend investors take profits or reduce holdings of blue chips such as AMMB, Axiata, Gamuda and Public Bank as their overbought technical conditions begs for profit-taking correction.

Conversely, look for buying opportunities on dips oil & gas-related stocks such as SapuraCrest, Scomi Group, Dialog, Kencana and SAAG for significant medium-term upside.As for upside potential, strong buying momentum in the region of 1.5 billion to 2 billion shares is critical to sustain upward momentum towards the next two pivotal resistance of 1,153 and 1,165, the respective July 18 and July 31 pivot high last year.

Note the second upside target mirrors the 50 per cent Fibonacci Retracement (FR) of the sell-off from record high of 1,525 to 801 pivot low at 1,163 that suggests this level could be a formidable ceiling.

As for the downside, look for immediate support from the bullish breakout point of 1,095, with stronger cushion anticipated at 1,083.