FBM KLCI to see mild consolidation

Oil & gas related counters such as Kencana, SapuraCrest and Scomi Group should attract buyers on dips given the firm crude oil prices, says a head of research



Shares on Bursa Malaysia roared higher as trading began for the new year, with lower liners enjoying strong gains on robust buying momentum which jumped to a six-month high on active rotational plays as market players returned from the year-end holidays.

For the first week of 2010, the FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) climbed 20.2 points, or 1.6 per cent to 1,292.98, with index heavyweights CIMB (+54 sen), Axiata (+11 sen) and IOI Corp (+12 sen) contributing to half of the index's rise. Daily average traded volume and value ballooned to 1.43 billion shares worth RM1.59 billion, the highest since mid-June last year, from 555.9 million shares worth RM744.6 million in the previous week.

The sudden spurt of activity in the local market early last week came unexpectedly as positive manufacturing indicators from the US, China, Europe and India beefed up market sentiment. The fact that trading volume on Bursa Malaysia almost tripled but not the value signified interest in lower liners and small caps, which is in line with the characteristics of a "January Effect". Got a great travel photo? Can it win this photo contest?

The benchmark index went through some consolidation in the second part of the week in line with price weakening in global markets.

While we are off to a good start in the New Year in terms of market activity, the local corporate scene is not without dampeners. For example, the discontent between the board of directors and management of Petra Perdana has spiked with the suspension of almost the entire senior management team that handles operations, internal audit & compliance, legal, accounts and finance departments.

Investors can consider shares of its competitors like Tanjung Offshore (Buy, Target Price: RM1.59), Dayang Enterprise (Not Rated) and Alam Maritim (Not Rated).

The market was not short of speculative news last week when talk of an internal investigation at Alliance Financial Group and its senior managers leaving spread. Nonetheless, their statement that the internal investigation will not have any impact on provisions, financial statement or lead to any legal suits is comforting. The current price weakness in the shares could be a good opportunity to accumulate based on a price target of RM2.90.

The broader market is expected to go through a mild profit-taking consolidation this week. Nonetheless, as the market undertone is still positive and the strong volume expansion signified more tolerance for risk, investors should view any price correction as an opportunity to buy high beta stocks that have good fundamentals apart from selective exposure in defensive picks in power and glove sectors.

Technical outlook

Stocks broke out from consolidation on the first trading day of the year, with lower liner construction and water-related stocks leading gains on hopes they will clinch some of the major government infrastructure projects yet to be awarded. The market extended its rally in the next two trading days with daily volume surging way above the one-billion-share mark, a six-month high, as investors returned from the year-end holidays to participate.

The market finally dipped for a profit-taking correction on Thursday due to overbought conditions and corrections in the region led by Hong Kong on concern over China's tightening monetary policy. Stocks ended flat ahead of the weekend as bargain hunting offset profit-taking interest, but trading momentum slowed significantly as investors consolidated their positions.

The FBM KLCI rose from opening low of 1.272.25 last Monday and surged to a near 20-month high of 1,299.7 in early Thursday session, expanding to a 27.45-point trading range last week, compared with the 11.95-point trading range the previous week.

The daily slow stochastics indicator for the FBM KLCI has entered the overbought zone with a reading above 80, but the weekly indicator just hooked up and crossed for a buy signal at the neutral region. The 14-day Relative Strength Index (RSI) indicator sustained a positive hook-up reading above 60, while the 14-week RSI also maintained a bullish stance, albeit with a higher reading of above 70, which represents the overbought line.

The daily Moving Average Convergence Divergence (MACD) indicator recovered further to extend its upward expansion, while the weekly MACD signal line is levelling to suggest weakening downside momentum. As for the 14-day Directional Movement Index (DMI) trend indicator, the +DI and -DI lines have expanded to maintain a positive signal on a rising ADX line which suggests a strengthening uptrend.

Conclusion

Daily technical momentum indicators have signalled initial overbought conditions for the local market, suggesting profit-taking consolidation should follow after last week's strong rally. However, the anticipated profit-taking should be shallow, with the strong average daily trading volume which jumped to a six-month high providing a good downside cushion. Revival of rotational plays should highlight lower liners as blue chips consolidate.

Following last week's breakout to a near 20-month high, immediate support for the FBM KLCI is revised to 1,287, the 23.6%FR Fibonacci Retracement (FR) of the upswing from the 1,248 pivot low of November 30 to the January 7 high of 1,299.7. Stronger retracement supports are at 1,280 and 1,274, the respective 38.2 per cent FR and 50 per cent FR levels. Expect the recent high near 1,300 and April 29 2008 pivot high of 1,305 to act as immediate hurdles capping upside pending a breakout, which could take the benchmark index up to 1,354 in coming weeks.

On blue chips, investors may look for buying opportunity on profit-taking dips in Genting Bhd, Maybank, Sime Darby and Tenaga for medium-term upside. However, look to sell rallies on MRCB, Tebrau and UEM Land given the weak follow-through buying momentum. Meanwhile, oil & gas related counters such as Kencana, SapuraCrest and Scomi Group should attract buyers on dips given the firm crude oil prices, while other lower liners such as 3A Resources, JAKS Resources, KHSB and KPS may also attract buyers for rotational play.

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