A very red and wild October

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AMERICAN stock markets tumbled on Wednesday after the large overnight drops in Europe. A large Greek equity sell-off and a cut to Germany’s growth forecasts stirred memories of the eurozone’s sovereign-debt crisis in 2011.

A bigger-than-expected drop in US retail sales also ignited concern about the impact of the global slowdown on the American economy. The S&P 500 Index plunged 15.21 points to close at 1,862.49 points whilst the Dow tumbled 173.45 points to end at 16,141.74.

The FBM KLCI index traded in a wider range of 41.18 points for the week with lower volumes of 1.81 billion to 2.58 billion shares traded. The index closed at 1,767.77 points on Oct 16, down 19.07 points from the previous day as blue-chip stocks such as Axiata Group Bhd, CIMB Group Holdings Bhd, Genting Bhd, SapuraKencana Petroleum Bhd and UMW Holdings Bhd caused the index to fall on persistent selling 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, have been 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 turned negative recently. As such, the index’s weaker support levels are seen at 1,700, 1,727 and 1,759, while the resistance areas of 1,767 and 1,800 and 1,829 would offer heavy liquidation and selling activities.

The KLCI’s simple-moving averages (18, 40 and 20) 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. 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 KLCI index, we are recommending a chart “sell” on British American Tobacco (M) Bhd (BAT). BAT turned into downtrend since hitting its recent 52-week high of RM73.48 in August 2014. At Maybank Investment Bank Bhd, our fundamental analyst has an unchanged “sell” call on BAT and target price of RM62. In a surprise move in early September 2014, BAT announced an 8% to 9% price hike per cigarette box. This was its third price increase in just over a year, but BAT reversed its decision after two weeks.

Despite the surprising U-turn to pre-Sept 8 price hikes, our analyst’s forecast remains unchanged as he had expected higher operating costs and assumed a larger 12% year-on-year volume contraction will mitigate the higher revenue from the price hike. With the reversion of the price hike, our analyst currently assumes a 6% per annum contraction.

A check of the Bloomberg consensus reveals that 17 research houses have coverage on BAT. Of the 17, there are only two “buy” calls, seven “hold” calls and eight “sell” calls. This stock currently trades at expensive price-to-earnings ratio of 21.6 times while its price-to-book value ratio of 34.9 times indicates that its share price is trading at a premium to its book value. The reported shareholding changes on Bloomberg revealed net selling by mostly foreign institution funds over the past month.

BAT’s 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 all-time high of RM73.48 in August 2014. Since that RM73.48 high, BAT plunged to its recent October 2014 low of RM65.14.

As prices broke above their recent key critical support levels of RM71.50 and RM71.20, look to sell BAT on any rebound to its resistance areas as the moving averages depict very firm short- to medium-term downtrends for this stock.

The daily indicators (like the CCI, DMI, MACD and Oscillator) have issued “sell” signals and now depict very firm indications of BAT’s eventual move towards much lower levels. It would attract very weak buying interest at the support levels of RM63.05, RM65.14 and RM65.50. We expect BAT to attract major liquidation towards its resistance levels of RM66.72, RM71.20 and RM71.50. Its downside targets are located at RM62.75, RM61.90 and RM56.90.

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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 17, 2014