KLCI >>> More consolidations or reversal week ahead?

Bursa Malaysia fell from a nine-month peak of 1,095.91 on June 12 to a low of 1,052.48 on Thursday before halting. Unlike the two previous consolidation phases that happened in late April and mid-May, the pullback this time was steeper than expected, catching many people by surprise.

As a consequence, the Kuala Lumpur Composite Index (KLCI) tumbled 30.65 points, or 2.8 per cent week-on-week to close at 1,059.50, with losses in Maybank (-3.22 points), Tenaga (-2.37), Genting (-2.36) and Axiata (-2.31) representing a third of the benchmark index's fall. Average daily trading volume and value fell to 1.58 billion shares worth RM1.64 billion, from 2 billion shares worth RM1.72 billion in the previous week.

Bursa Malaysia shares eased on profit-taking last Monday, led by lower liners falling in line with the region after the G8 finance ministers hinted that they may withdraw stimulus spending if green shoots in the global economy gain pace.

The termination by a Dubai investment authority of a memorandum of understanding with UEM Land over a major land sale, and the Sultan of Johor's opposition to the proposal for a third bridge linking Singapore and east Johor caused a sell-off in related lower liners last week, while blue chips fell in line with corrections in the region.

Among the other indices week-on-week, the FBM-EMAS Index retreated 259.22 points, or 3.5 per cent, to close at 7,098.53, while the FBM-Small Cap Index (SCI) plunged 950.72 points, or 9.5 per cent, to 9,023.90. The plunge in lower liners, with construction and property stocks related to Iskandar Malaysia leading the losses, contributed to the severe correction in the SCI.

Sector-wise, anticipate construction and property stocks related to Iskandar Malaysia to remain under pressure. However, oil and gas related stocks could continue to gain investors' favour given the resilient crude oil prices and the possibility of rising inflation lifting commodity prices further.

Against the negative backdrop, share prices retreated. Blue chips took a beating while institutional investors stayed on the sidelines.

Light at the end of the tunnel but question is, how long is that tunnel?

A couple of weeks ago, we pointed out that the market was looking “top heavy” and also mentioned the journey ahead would be tough, dropping hints the local bourse is due for a breather soon. Hence, the retracement is very much anticipated and needed, viewed as a healthy process and should not cause any panic in the marketplace. So, we are not talking about this issue but something of more significance and importance.

Technically, short-term indicators are deteriorating, particularly the daily MACD, suggesting the local bourse may remain in consolidation mood for a while, with the CI probably flirting within a moderate range this week.
Moving Averages Convergence Divergence : After flashing a sell on Tuesday, the daily moving-average convergence/divergence (MACD) histogram expanded negatively against the daily trigger line to stay bearish. The daily MACD trend indicator also registered a bearish divergence reading following last week's sell-off, while the weekly MACD signal line is levelling off to signal weakening uptrend.

DMI

On the 14-day Directional Movement Index (DMI) trend indicator, the ADX line has turned lower for a reading of 37.21 last Friday, while the contracting +DI and -DI lines will trigger a sell signal if the index weakens further this week.

Relative Strength Index : Also, the 14-day RSI weakened sharply from a reading of 80 on Monday to the 36 points on Thursday before pausing. Weekly indicators were waning, with the weekly slow-stochastic momentum index in danger of moving out of the bullish territory and the upward thrust of the weekly MACD slowing considerably.

Stochastics : The daily slow stochastics indicator for KLCI has levelled off at the oversold region following last week's sharp decline, while the weekly indicator hooked down from the overbought level to register a bearish divergence.

Simple Moving Averages :

From monitoring the daily bar chart, a positive sign has emerged, namely a “golden crossing” of the 100-day SMA over the 200-day SMA.

Investors should take note that this type of crossing usually take several months to develop and when it happens, it basically confirms a bullish reversal of the existing trend, which is more reliable for the medium to longer term, but on conditions the CI continues to retain the posture above the 100-day SMA and 200-day SMA and the “positive crossing” stays intact.

Going forward, as long as the bulls can fulfil the above mentioned criteria, we are certain Bursa is on the road to recovery.

As for the downside for the KLCI this week, critical supports from the 30-day SMA at 1,052 and the rising lower Bollinger band at 1,036 must not be broken on a closing basis to maintain near-term upward momentum for the broader market.

A more important retracement support is at 1,034, the 23.6 per cent Fibonacci Retracement (FR) of the uptrend from 836 pivot low of March 12 to the recent peak of 1,095.91 of June 12. A decisive breakdown below this crucial support will see more significant downside risk towards next retracement support of 38.2 per cent FR at 996. On the upside, expect immediate resistance at 1,073, next at 1,083 and then 1,090 to 1,095.