Rebounding into selling turbulence

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AMERICAN stock markets tumbled on Wednesday as energy shares led losses amid a drop in crude oil prices. A shooting at the national legislature in Ottawa raised terrorism concerns nationwide in Canada. Boeing Co fell 4.5% to US$121.45 (RM398), as it is not moving fast enough to curb rising costs on the 787 Dreamliner. The SP500 Index plunged 14.17 points to close at 1,927.11 points whilst the Dow tumbled 153.49 points to end at 16,461.32.

In Malaysia, the FBM KLCI index traded in a narrower range of 23.06 points for the week with lower volumes of 1.25 billion to 2.05 billion traded. The index closed at 1,810.68 yesterday, up 14.46 points from the previous day as blue chip stocks like Genting Bhd, KLCCP Stapled Group, Kuala Lumpur Kepong Bhd, Petronas Gas Bhd and Tenaga Nasional Bhd caused the index to rise on constant nibbling 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).

Most of the index’s daily signals have turned negative recently. As such, the index’s weaker support levels are seen at the 1,766, 1,784 and 1,800 levels, while the resistance areas of 1,810, 1,823 and 1,879 would offer heavy liquidation and selling activities.

The FBM KLCI’s simple moving averages (18, 40, 50 and 200 SMA) 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 50 and 200 SMA have also issued a “Dead Cross” and fund managers would be selling the FBM KLCI index and components on any rebound rallies. The selling pressure would be intense and persistent if and when the index rebounds towards its retracement levels of 1,815.88, 1,822.92, 1,831.22, 1,836.30 and 1,846.57. Downside targets for this move are at 1,730 (in the short term) and 1,682 (in the medium term).

Due to the softer tone for the FBM KLCI index, we are recommending a chart “sell” on Malaysian Pacific Industries Bhd (MPI). MPI turned into a severe downtrend since hitting its recent 52-week high of RM6.49 in August 2014. This is consistent with the sell-off in the technology sector at the beginning of October, which saw the KLTECH index tumbling approximately 27% from its peak since August 2014. A check on the KLTECH members reveals that MPI is currently the fifth largest constituent on the index.

MPI recently reported its fourth quarter ended August of financial year 2014 (4QFY14) results and is expected to announce its 1QFY15 results in the middle of November 2014. In its announcement, MPI highlighted that revenue growth year-on-year was higher with Asia at 3%, the United States at 3% and Europe at 16%. The improved profitability for the year was attributed to robust pricing and appreciation of the US dollar vs ringgit, and a shift towards higher margin products and lower commodity costs.

A check of the Bloomberg consensus reveals that seven research houses have coverage on MPI. Of the seven, there are six “buy” calls and one “hold” call. This stock currently trades at expensive price-to-earnings ratio of 19.9 times as well as a high prive-to-book value ratio of 1.3 times. The reported shareholding changes on Bloomberg revealed minor net profit taking by local institution funds over the past month.

MPI’s chart trend on the daily and weekly 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 RM6.49 in August 2014. Since that RM6.49 high, MPI plunged to its recent October 2014 low of RM4.19.

As prices broke above its recent key critical support levels of RM5.48 and RM5.35, look to sell MPI 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 and MACD) have issued “sell” signals and now depict very firm indications of MPI’s eventual move towards much lower levels. It would attract very weak buying interest at the support levels of RM3.89, RM4.19 and RM4.50. We expect MPI to attract major liquidation towards its resistance levels of RM4.75, RM5.35 and RM5.48. Its downside targets are located at RM4.15, RM3.70 and RM2.88.

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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 24, 2014.