Persistent October market malaise

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AMERICAN stock markets rebounded on Wednesday after Tuesday’s drop of 272.52 points for the Dow. Investors rushed back into the United States equity markets after the US Federal Reserve’s hint that interest rates will stay near zero as recent concerns on slower global growth gripped market participants.

The International Monetary Fund (IMF) had earlier cut economic growth forecasts this week. The SP500 Index rose 33.79 points to close at 1,968.89 points whilst the Dow surged 274.83 points to end at 16,994.22.

The FBM KLCI index traded in a wider range of 25.15 points for the week with lower volumes of 1.81 billion to 2.58 billion traded. The index closed at 1,829.73 yesterday, up 5.41 points from the previous day as blue-chip stocks like British American Tobacco (M) Bhd, Genting (M) Bhd, Hong Leong Financial Group Bhd, IOI Corp Bhd and KLK Bhd caused the index to rise on some nibbling activities ahead of the Budget 2015 announcement later today.

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 1,824-levels, whilst the resistance areas of 1,829 and 1,854 and all-time high of 1,896 would offer heavy liquidation and obvious profit-taking activities.

The KLCI’s simple moving averages (18, 40 and 200 MA) 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 KLCI index, we are recommending a chart “sell” on Coastal Contracts Bhd. Coastal turned into downtrend since hitting its recent 52-week high of RM5.40 in August 2014. The downside trend is due to weaker overall market sentiment for the small- and mid-cap stocks in especially the oil and gas sectors.

We believe that most of the positive news flow for its latest quarterly announcement reported in August has already been factored into its share price, as Coastal’s share price surged in June and July before the result was announced. Since then, falling global crude oil prices have triggered a bearish mood and investors have been quick to lock-in profits.

A check with the Bloomberg consensus reveals that five research houses cover Coastal with “buy” calls on the stock. This stock currently trades at an undemanding price-to-earnings ratio of 11.3 times while its price-to-book value ratio of 1.77 times indicates that its share price is trading at a premium to its book. The reported shareholding changes on Bloom-
berg revealed no major transactions over the past month with minor net selling by local institution funds.

Coastal’s chart trend on the daily time frame is very weak and is firmly down. Its share price has made a large plunge since its daily Wave-5 and recent high of RM5.40 in August 2014. After that RM5.40 high, Coastal plunged to its recent October 2014 low of RM4.23.

As prices broke above its recent key critical support levels of RM5.11 and RM4.94, look to sell Coastal 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 (like the CCI, DMI, MACD, Oscillator and Stochastic) have issued sell signals and now depict very firm indications of Coastal’s eventual move towards much lower levels. It would attract very weak buying interest at the support levels of RM3.56, RM4.01 and RM4.23. We expect Coastal to attract major liquidation towards its resistance levels of RM4.31, RM4.94 and RM5.11. Its downside targets are located at RM4.03, RM3.33 and RM3.13.

 

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.

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This article first appeared in The Edge Financial Daily, on October 10, 2014.