October market blues

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AMERICAN stock markets plunged on Wednesday while Treasuries rallied as the Federal Reserve held its course to end its bond-buying programme in October amid growing signs of economic weakness in Europe and the United States. Euro-area factories reduced prices the most in more than a year and German manufacturing shrank. The US Institute for Supply Management (ISM) index for August came in at 56.6, well off July’s 59.0 reading. The SP500 Index tumbled 26.13 points to close at 1,946.16 points while the Dow plunged 238.19 points to end at 16,804.71.

In Malaysia, the FBM KLCI index traded in a narrow range of 16.66 points for the week with higher volumes of 2.13 billion to 2.73 billion traded. The index closed at 1,837.68 yesterday, down 7.64 points from the previous day as blue chip stocks such as British American Tobacco (M) Bhd, CIMB Group Holdings Bhd, Hong Leong Financial Group Bhd, Maxis Bhd and SapuraKencana Petroleum Bhd caused the index to fall on persistent liquidation activities.

The index rose on a rally from the 801.27 low (October 2008) to the previous 1,826.22 all-time high (May 2013) and it represents an extended Elliott Wave “Flat” rebound in a “Pseudo-Bull” rise completed. The next few months’ index price movements since May 2013 was trapped in a rangy consolidation with key swings of 1,723.74 (low), 1,811.65 (high), 1,660.39 (low), 1,805.15 (high), 1,759.66 (low), 1,882.20 (high), 1,769.80 (low), 1,838.69 (high), 1,802.88 (low), 1,896.23 (high), 1,837.28 (low) and 1,879.62 (high).

All the index’s daily signals have turned negative recently. As such, the index’s weaker support levels are seen at the 1,802, 1,821 and 1,829 levels, while the resistance areas of 1,837, 1,854 and all-time high of 1,896 would offer heavy liquidation and obvious profit-taking activities.

The FBM KLCI’s simple moving averages (MA) of 18, 40 and 200 depict an emerging downtrend for its daily and weekly charts. With the prices breaking below the larger and lower rising wedge support line on Sept 15, 2014, we foresee longer-term selling activities for the index. The selling pressure would be intense and persistent if and when the index rebounds. We had witnessed an index rebound that stalled at 1,854.21 on Sept 30, 2014. This level was exactly the 38% Fibonacci retracement of the recent high-low move from 1,896.23 to 1,829.24.

Due to the softer tone for the FBM KLCI index, we are recommending a chart “sell” on Silk Holdings Bhd. Silk Holdings fell off its recent 52-week high of RM1.24 (August 2014) to its current level of RM0.815 after news of Silk Holdings proposal to dispose 100% equity interest in Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd (Silk) in June 2014. This may have generated investor interest that lifted the stock from January 2014 to its August high in 2014.

With the overall profit-taking trend unfolding across the oil and gas sector, we believe that investor sentiment will remain lacklustre as Silk Holdings also has exposure in the offshore support vessel (OSV) services segment.

A check with Bloomberg consensus reveals that no research house covers Silk Holdings. The stock is currently trading at high price-to-book value (P/BV) ratio of 2.73 times, while its debt-to-assets ratio is about 76% and the company’s latest quarterly announcement shows negative earnings. The reported share-holding changes on Bloomberg revealed no major transactions over the past month.

Silk Holdings’ chart trend on the daily time frame is very weak and is firmly down. Its share price made a large plunge since its daily Wave-5 and recent high of RM1.24 in July 2014. Since that RM1.24 high, Silk Holdings plunged to its recent October 2014 low of RM0.815.

As prices broke above its recent key critical support levels of RM1.16 and RM1.03, look to sell Silk Holdings on any rebounds to its resistance areas as the moving averages depict very firm short-to-medium term downtrends for this stock.

The daily and weekly indicators (such as the CCI, DMI, MACD and Stochastic) have issued sell signals and now depict very firm indications of Silk Holdings’ eventual move towards much lower levels. It would attract very weak buying interest at the support levels of RM0.55, RM0.63 and RM0.78.

We expect Silk Holdings to attract major liquidation towards its resistance levels of RM0.83, RM1.03 and RM1.16. Its downside targets are located at RM0.81, RM0.66, RM0.50 and RM0.47.

Lee Cheng Hooi is the regional chartist at Maybank Kim Eng. The views expressed in the article are the opinions of the writer and should not be construed as investment advice. Please exercise your own judgment or seek professional advice for your investment decisions. Technical report appears every Wednesday and Friday.

This article first appeared in The Edge Financial Daily, on October 3, 2014.