PROFIT-TAKING PULLBACK SEEN

IN spite of overbought technical conditions and persistent profit-taking on small caps and ACE Market stocks, the blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) edged up to a fresh 3½-year high on Friday.

Buying support on major consumer and banking stocks managed to shore up the index, ignoring concerns over the rising United States interest rates and inflation, which had kept regional markets in a cautious mood.

Week-on-week, the blue-chip benchmark FBM KLCI climbed another 16.56 points, or 0.9 per cent, to 1,870.48, with Nestle Bhd (+RM4.40), Hong Leong Financial Group (+72 sen), Petronas Dagangan Bhd (+72 sen), Public Bank Bhd (+70 sen) and Hong Leong Bank Bhd (+60 sen) accounting for most of the gains.

Average daily traded volume and value dwindled further to 2.95 billion shares worth RM2.88 billion, compared with the 3.6 billion shares and RM2.7 billion, respectively, in the previous week, as buying momentum waned with investors stepping away due to a two-day holiday break and the overall cautious market undertone.

The spillover effect from the Wall Street’s sharp correction, especially the Dow Jones that fell almost 666 points to 25,521 last Friday, should be felt when the local market reopens today. The US equity indices took a sharp beating after the jobs report. Earlier, investors interpreted the Federal Reserve’s affirmative comments about the US economy and inflation outlook as an indication for greater-than-expected hike in the US interest rate.

Changing expectations for faster-than-expected hike in the US interest rate could lead to a reversal in net foreign inflows that we have witnessed in the last two months and the US markets’ correction last Friday could be a valid excuse to ease the overbought pressure from the FBM KLCI momentarily. The timing also coincides with the usual profittaking period prior to Chinese New Year.

However, bearing in mind that the local equity market usually performed well in the pre-election periods, buying support from local funds could cushion any severe correction in the local market in the short-term. The positive near-term outlook for crude oil prices and the strength of the ringgit could be other mitigating factors that could prevent any steep selldown in the immediate-term apart from a potential rebound in the US financial markets after the steep selling.

In the medium-term, it is crucial for corporate earnings growth to pick up momentum to match other regional markets for the local market to remain attractive from a valuation stand point.

Technical Outlook

While lower liners stayed in profit-taking consolidation mode last Monday, major consumer and banking stocks led gains to lift the local benchmark index to end at the highest in more than three years.

The FBM KLCI surged 16.6 points to close at the day’s high of 1,870.52, off an opening low of 1,855.09, but losers beat gainers 623 to 370 on moderate turnover totalling three billion shares worth RM2.49 billion.

Stocks fell on Tuesday as investors took profits on recent strong gains after oil prices dipped and the ringgit eased following the overnight correction on the Wall Street. The FBM KLCI shed 1.94 points to close at 1,868.58, off a high of 1,872.7 and low of 1,861.58 as losers thrashed gainers 794 to 252 on higher turnover of 3.25 billion shares worth RM2.89 billion.

The local benchmark ended steady on Friday after a two-day holiday break.

The index edged up 1.9 points to settle at 1,870.48, off a threeand-a-half-year high of 1,880.56 and low of 1,863.43 as losers beat gainers 610 to 404 on reduced turnover of 2.61 billion shares worth RM3.25 billion.

Trading range for the local blue-chip benchmark index last week was 25.47 points, compared with the 28.56 points range in the previous week, as strength in core consumer and banking stocks nudged it up to the highest since August 2014. For the week, the FBM Emas Index edged up 2.08 points to 13,376.58, but the FBM Small Cap Index tumbled 396.13 points, or 2.27 per cent, to close the week at 17,022.35, with further profit-taking and liquidation of trading positions pressuring small-cap stocks lower.

A short-term sell signal was triggered on the daily slow stochastic momentum indicator for the FBM KLCI at the extreme overbought region following last Friday’s close off a fresh threeand-a-half year high, but the weekly indicator’s signal line inched deeper into overbought territory.

The 14-day Relative Strength Index (RSI) indicator stayed overbought with a lofty reading of 79.03 as of last Friday, while the 14-week RSI edged up for a similarly high overbought reading of 78.31.

On the other hand, the daily Moving Average Convergence Divergence (MACD) trend indicator improved on its upward trajectory, while the weekly MACD indicator continued to strengthen and expand positively. In the meantime, the +DI and –DI lines on the 14-day Directional Movement Index (DMI) trend indicator sustained their bullish expansion on a rising ADX line, suggesting renewed uptrend momentum.

Conclusion

Extreme overbought technical momentum indicators on the FBM KLCI, highlighted by a daily stochastics sell signal, implies higher probability for a long overdue overbought correction this week.

Moreover, given the sharp correction on the Wall Street last Friday, triggered by the strongerthan-expected January jobs data, which increased worries over rising US interest rates and inflation risk, a profit-taking pullback should spill over from the region.

Immediate support on this correction will be the rising 10-day moving average now at 1,847, followed by the mid Bollinger band at 1,834, and then 1,800 and 1,796, the breakout level. Immediate resistance will be last Friday’s high of 1,880, followed by the 150 per cent FP of the November 2016 low to the breakout level at 1,888, subsequent to the all-time high of 1,896 on July 2014.

The spillover effect from the Wall Street’s sharp correction, especially the Dow Jones that fell almost 666 points to 25,521, last Friday, should be felt when the local market reopens today.

The subject expressed above is based purely on technical analysis and opinions of the writer. It is not a solicitation to buy or sell.