Sell on any fleeting price rebounds

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AMERICAN stock markets plunged on Wednesday as the Organisation of the Petroleum Exporting Countries forecast that oil demand would remain poor in 2015 and US crude inventories rose to the highest seasonal level since 1982. The oil rout is feeding concerns about deflation from Tokyo to Beijing and Brussels amid weakening global growth. The S&P 500 Index tumbled 33.68 points to close at 2,026.14 points whilst the Dow plunged 268.05 points to end at 17,533.15.

In Malaysia, the FBM KLCI gyrated in a wide range of 34.75 points for the week with lower volumes of 1.21 billion to 1.44 billion traded. The index closed at 1,744.57 yesterday, down 20.95 points from the previous day as blue-chip stocks like British American Tobacco (Malaysia) Bhd, Petronas Dagangan Bhd, Petronas Gas Bhd, Public Bank Bhd and Tenaga Nasional Bhd caused the index to decline on persistent selling activities. The ringgit remained weaker against the US dollar at 3.4890 as Brent crude oil tumbled to US$63.73.

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 had 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), 1,879.62 (high), 1,766.22 (low) and 1,858.09 (high).

All the index’s daily signals have turned negative recently. As such, the index’s weaker support levels are seen at the 1,660, 1,702 and 1,730 levels, whilst the resistance areas of 1,744, 1,789 and 1,858 will cap any index rebound.

The KLCI’s 18 and 40 simple moving averages (SMAs) depict an obvious downtrend for its daily chart. In addition to that, the 50 and 200 SMAs have also issued a “Dead Cross” and the index prices remain below these two longer-term SMAs.

The index appears to be in a severe downtrend since the 1,896.23 high of July 2014. An intermediate low was seen at 1,730.77 on Nov 9. However, this year-end window-dressing short-term rebound phase will be pyrrhic in nature. Investors will be offloading key blue-chip stocks on this fleeting rebound. Ultimately, the KLCI is headed to 1,630.87 in the medium term, with intermediate short-term downside targets of 1,705 and 1,696.

Due to the weaker tone for the KLCI, we are recommending a chart “sell” on DRB-Hicom Bhd (DRB-Hicom). DRB-Hicom recently released their second quarter of 2014 results at the end of November. The results showed revenue for six months of financial year 2014 (6MFY14) rising by 3.7% and profit-before-tax increasing by 11.5% compared with the 6MFY13 period. Further to the announcement, the improved profitability was attributed to all the three business segments — the automotive, the services, and the property, asset and construction sector.

A check of the Bloomberg consensus reveals that six research houses have coverage on DRB-Hicom. Of the six, there are five “buy” calls and a single “hold” call. This stock currently trades at a low price-earnings ratio of 5.7 times while its price-to-book value ratio of 0.39 times indicates that its share price is trading at a steep discount to its book value. The reported shareholding changes on Bloomberg revealed there was net selling from both local and foreign investors over the past month.

DRB-Hicom’s chart trend on the daily, weekly and monthly time frames is very firmly down. Its share price made a large decline since its major monthly Wave-4C high of RM3.03 in February 2012. Since that RM3.03 high, DRB-Hicom fell to its December 2014 recent low of RM1.51.

As prices broke below its recent key critical support levels of RM2.32 and RM1.96, look to sell DRB-Hicom on any rebounds to its resistance areas as the moving averages depict very firm short- to long-term downtrends for this stock.

The daily, weekly and monthly indicators (like the CCI, DMI, MACD, Oscillator and Stochastic) have issued sell signals and now depict very firm indications of DRB-Hicom’s eventual move towards much lower levels. It would attract firm selling activities at the resistance levels of RM1.51, RM1.96 and RM2.32. We expect DRB-Hicom to witness weak buying interest at its support levels of RM1.13, RM1.25 and RM1.50. Its downside targets are located at RM1.37, RM0.84 and RM0.55.

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 December 12, 2014.