Expect market to trend sideways

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A WEAK ringgit and continuous decline in crude oil prices weighed down the market which has been bullish for two weeks. The FBM KLCI did not manage to test the 1,830 points resistance level but pulled back after the index climbed as high as 1,810.21 points last week. The KLCI finally declined 1.2% in a week to 1,781.26 points. This was also in line with the declines in the regional market.

The average daily trading volume has declined from 2.3 billion shares two weeks ago to two billion shares last week. Average daily trading value, however, increased from RM2.5 billion to RM2.6 billion. This indicates that the market is being traded mostly by institutions which normally trade higher priced counters.

Foreign institutions were buying in the earlier part of the week but there was more selling from them in the later part of the week. Local retail was also a net seller in the market as confidence weakened. Net selling from foreign institutions in the past one week (last Monday to Thursday) was RM68.5 million and local retail was RM73.3 million. Net buying from local institutions was RM141.7 million.

In the KLCI, decliners outpaced gainers five to two. Top three decliners in the index were Petronas Chemicals Group Bhd (-8.1% from last week), IOI Properties Group Bhd (-5.9%) and AMMB Holdings Bhd (-4.9%). Top three gainers in the index were RHB Capital Bhd (+4.5%), Genting Malaysia Bhd (+3.3%) and YTL Corp Bhd (+2.9%).

Markets pulled back on a cautious mode after increases in the past two weeks. The Shanghai Stock Exchange Composite Index declined 4.2% in a week to 3,211.67 points. Hong Kong’s Hang Seng Index increased 1.4% to 24,507.05 points. However, Japan’s Nikkei 225 continued to rise mildly, increasing 0.9% in a week to 17,674.39 points. Singapore’s Straits Times Index pulled back from its 19-month high last week to close 0.6% lower in a week to 3,391.20 points.

Markets in United States and Europe pulled back after strong increases two weeks ago. The US Dow Jones Industrial Average declined 2.9% in a week to 17,164.95 points. London’s FTSE100 index fell 0.9% in a week to 6,764.06 points and Germany’s DAX Index was almost unchanged from the previous week at 10,694.32 points after pulling back from a record close of 10,798.33 points last Monday. The US dollar was marginally lower but continued to stay at a 11-year high at 95 points. The ringgit continued to weaken against the US dollar, falling from RM3.58 to RM3.63 to a US dollar, the lowest since September 2009.

After three weeks of increase, gold finally pulled back for a correction. Commodity Exchange gold declined 0.9% in a week to US$1,283 (RM4,644) an ounce. Crude oil rebounded from its five-year low. New York Mercantile Exchange WTI crude rose 5.6% in a week to US$47.85 per barrel. Crude palm oil futures in Bursa Malaysia fell another 3.6% in a week to RM2,147 per tonne on weak demand outlook.

Despite the decline, the KLCI remains bullish above the short-term 30-day moving average (MA) and the Ichimoku Cloud indicator. However, the index is still below the long-term 200-day MA which is at 1,833 points. The failure to climb above the resistance level at 1,830 points indicates weak market confidence and hence the long-term bearish trend may continue if the index is unable to stay above the immediate support level. The immediate support level is at 1,770 points.

Momentum indicators like the RSI, MACD and Momentum Oscillators are still above their mid-levels and this indicates that the momentum is still bullish. However, the indicators started to decline towards their middle levels and this indicates that the bullish momentum is weak. Furthermore, the index pulled back from the top band of the Bollinger Bands towards the middle band and this indicates a correction.

After the long weekend holiday, we expect the market to be trending sideways, unless there is a strong catalyst that affects the market while we are on holiday, such as drastic fall in crude oil prices, strong movement in global equity markets and significant ringgit movement. If there are no strong catalysts, then we expect the index to decline to the support level at 1,765 points and trade between this level and the immediate resistance level at 1,810 points.

fbmklci_4Feb15

This article first appeared in The Edge Financial Daily, on February 4, 2015.