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US markets ended much lower on Wednesday as American investors fretted about when the US Federal Reserve would raise American interest rates. More damagingly for the markets was the fact that Greece is stumbling closer to defaulting on its debts as negotiations in Brussels yielded little progress, and no breakthrough was in sight ahead of the June 30 deadline to repay €1.5 billion (RM6.3 billion) to the International Monetary Fund. The SP 500 Index tumbled 15.62 points to 2,108.58 points while the Dow Jones Industrial Average plunged 178 points to end at 17,966.07. 

In Malaysia, the FBM KLCI moved in a narrower range of 19.09 points for the week with lower volumes of 1.54 billion to 1.79 billion traded. The index closed at 1,716.81 yesterday, down 14.87 points from the previous day as blue-chip stocks like British American Tobacco (M) Bhd, PPB Group Bhd, RHB Capital Bhd, Telekom Malaysia Bhd and Tenaga Nasional Bhd caused the index to fall on some persistent selling activities. The ringgit was much weaker against the US dollar at 3.7570 as Brent crude oil inched up to US$62.25 per barrel. 

The index rose on a rally from the 801.27 low (Oct 2008) to its 1,896.23 all-time high (July 2014) and it represents an extended Elliott Wave “Flat” rebound in a “Pseudo-Bull” rise completed. The next few months’ index price movements since July 2014 comprised key swings of 1,837.28 (low), 1,879.62 (high), 1,766.22 (low), 1,858.09 (high), 1,671.82 (low), 1,810.21 (high), 1,706.18 (low), 1,831.41 (high), 1,774.30 (low) and 1,867.53 (high).

All the index’s daily signals are mainly negative for now, with its CCI, DMI and Oscillator indicators showing much weaker readings. As such, the index’s weaker support levels are seen at 1,671, 1,706 and 1,714, while the resistance areas of 1,716, 1,755 and 1,795 will cap any index rebound.

The KLCI’s 18-day and 40-day simple moving averages (SMA) depict an obvious downtrend with a “Dead Cross” for its short-term daily chart. The recent price bars of the index have also turned below the 50-day and 200-day SMA with a “Dead Cross” too. This may not augur well for the index, as the longer-term trend of the index is bearish as well. As such, the index remains on its persistent downturn from its recent 1,867.53 high in late April. 

Upon a break of the critical intermediate support of 1,714, the index may head towards its next downside targets of 1,671 and 1,623. A PTI of 79 on the charts may be interpreted as very firm chances of the index achieving the stipulated downside targets.

Due to the poorer tone for the KLCI, we are recommending a chart “sell” on K-One Technology Bhd (K1). Looking at the most recent results announcement for the first quarter of financial year 2015 (1QFY15), the group recorded lower revenue of RM32.6 million compared with RM45.9 million in 1QFY14. The decline of 29% was due to the reduced demand for network cameras. The lower revenue was due to customers lowering their inventory level requirements, and also the transfer of a couple of its network camera product lines to another manufacturing partner’s site. 

Correspondingly, profit before tax was also lower from the weaker sales. The lower profit was mainly due to three factors. A reduction in sales price for various product lines that were moving towards their end-of-life resulted in margin compression. Increased costs from the development of prototypes and sample pitches for new businesses also resulted in diminished margins. The difference in product mix in the current quarter compared with the same period last year also yielded lower margins overall.     

According to the announcement, K1 expects sales to pick up in the subsequent quarters pending the launch of new product lines, as well as sales being higher historically in the second half of the year. K1 also highlighted that the strength of the US dollar relative to the ringgit will be favourable to the group.

A check on Bloomberg consensus reveals that no research house covers the stock. The stock currently trades at a reasonable historical price-earnings ratio of 12 times. Its price-to-book value of 2.05 times indicates that its share price is trading at a steep premium to its book value.

K1’s chart trend on the daily and weekly time frames is very firmly down. Its share price made an obvious plunge since its major daily Wave-5 high of 67 sen on May 20,  2015. Since that 67 sen high, K1 has tumbled to its May 2015 recent low of 25.5 sen.

As prices broke above its recent key critical support levels of 57 sen and 43.5 sen, look to sell K1 on any rallies to its resistance areas as the moving averages depict a very firm short- to medium-term downtrend  for this stock. 

The daily and weekly indicators (like the CCI, DMI, Oscillator and Stochastic) have issued clear “sell” signals and now depict firm indications of K1’s eventual plunge towards lower levels. It would attract firm selling activities at the resistance levels of 28 sen, 43.5 sen and 57 sen. We expect K1 to witness weaker buying at its support areas of 12 sen, 22 sen and 25.5 sen. Its downside targets are located at 20 sen, 11 sen and seven sen.

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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 June 26, 2015.

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