KLCI >>> A Bearish Engulfer 27 April 2009

The bear hugged the KLCI for a good -12.56pts obviously assisted by the worries of a global swine flu epedemic.

The candlesticks formed a Bearish Engulfer pattern at the closing bell. Traded volume for the day was an impressive 2.11 billion shares - an increase of +1.4% over the previous day volume of 2.083 bn shares. Traders threw whatever they could out the window - ZL's exaggerated profit taking versi0n.The swine flu should be factored in as a one-off (unforseen circumstances) or market hazard with no regulated occurence pattern. From an optimistic viewpoit, it assisted to hasten the expected market correction by a few days at least. Better to be short and painful rather than a long drawn and deadly correction proceedings. Get it over with - quickly.

The daily slow stochastics indicator for KLCI flashed a buy signal in the
extended overbought zone (Chart 1),

but the weekly indicator clawed higher into the overbought region. The 14-day Relative Strength Index (RSI) is now extremely overbought with a reading of 81.92 as of last Friday, but the 14-week RSI showed a more robust reading of 61.1.


However, the KLCI daily and weekly Moving Average Convergence Divergence (MACD) trend indicators extended higher to suggest a stronger up-trend (Chart2).
The bullish trend is reinforced by expanding -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator, while the 14-week DMI strengthened further, implying an early stage bull market.


In A Nutshell
iven the convincing bullish breakout above the 200-day SMA resistance for the KLCI last week, it looks like market bulls are having a party (which the bears will most likely gatecrash) encouraged by strong follow-through buying momentum which peaked above the two billion
shares mark last Friday and this Monday. Nonetheless, due to the extremely overbought 14-day RSI and weekly slow stochastics momentum indicators, investors should be prepared for a more significant profit-taking correction this week. The bears WILL come dancing invited or not. However, the correction should be shallow and short-lived as buying momentum stays robust.
For this week, a decisive breakout above 1,000 will fuel upside towards 1,026 (Chart 3), which represent the 61.8% Fibonacci Retracement (FR) of the selloff from 1,164 pivot high of 31 July 2008 to the 801 pivot low of 28 October 2008, with next significant resistance from 1,040.85, the 22 September 2008 pivot high. A stronger upside hurdle will come from 1,079, the 76.4%FR which mirrors the 38.2%FR of the major sell-down from the 1,525 all-time high of 14 January 2008.


On the downside, immediate support is revised upwards to 983, the 50%FR, with better supports coming in at 970, and then 950. The 7 January pivot high of 936 will act as a formidable support floor upon a profit-taking correction.

Sector-wise, gaming stocks Genting and Resorts World should continue last week’s strong run-up on hopes for a recovery in casino revenues, while lowerliner steel and construction stocks such as Ann Joo, Kinsteel, Leader Steel, Perwaja, MRCB, Ranhill, UEM Land and Zelan should also out-perform on hopes for a strong revival of demand for building materials and property development.

Bearish Engulfing Pattern

As implied by its name, a bearish engulfing pattern may provide an indication of a future bearish trend. This type of pattern usually accompanies an uptrend in a security, possibly signaling a peak or slowdown in its advancement. However, whenever a trader analyzes any candlestick pattern, it's important for him or her, before making any decisions, to consider the prices of the days that precede and follow the formation of the pattern.