ANY REBOUND MAY ATTRACT SELLING

FOREIGN selling resumed to drag the local benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FBM KLCI) down to another fresh fivemonth low in the middle of last week, prior to a strong oversold rebound sparked by optimism the zero-rating of Goods and Services Tax (GST) will boost consumption in the immediate term.

The recovery was also encouraged by lessening worries over Italy’s political crisis after antiestablishment parties in the country decided to form a coalition government, reducing concerns over an exit from the eurozone.

For the week, the FBM KLCI sank another 41 points, or 2.3 per cent, to 1,756.38, as falls on Public Bank (-92 sen), Hong Leong Bank (-54 sen), Tenaga Nasional (-54 sen), TM (-32 sen) and Sime Darby offset gains in MISC (+23 sen) and Genting Bhd (+20 sen). Average daily traded volume and value last week improved to 3.32 billion shares worth RM4.7 billion, compared to the 2.58 billion shares and RM3.19 billion, respectively, the previous week.

A confluence of negative factors, both externally and locally, had contributed to the volatility in the FBM KLCI index so far after the 14th general election. Local politics aside, political instability in Italy and potential trade war among key economies were key concerns that affected market sentiment last week. Although news that a new populist government had been formed in Italy last Friday may improve market sentiment, the effect could be temporary.

Despite the government’s affirmation about the fiscal position in 2018, concerns would still linger about next year’s prospects, as the full year impact from GST revenue loss will be more prominent. The price of crude oil is also not within the government’s control and the outlook may turn less rosy if the ongoing trade war turns ugly and affect global demand. Thus, investors will be closely watching for more details on SST, when it is reintroduced on September 1, and the highlights of the 2019 Budget when it is tabled in November this year.

So, the recovery in the FBM KLCI is still fragile and could be subjected to further downside pressure, if foreign selling resumes, which is likely based on external uncertainties as mentioned earlier. Monetary tightening bias in the United States is another downside factor.

Technical Outlook Foreign selling resurfaced to drag key index heavyweights lower on Monday, further compounded by the global oil price slump as Saudi Arabia and Russia look to raise output amid surging US crude production. The FBM KLCI tumbled 21.56 points, or 1.2 per cent, to close at 1,775.84, off the opening high of 1,793.54 and low of 1,774.4, as losers beat gainers 600 to 360 on moderate turnover of 2.18 billion shares worth RM2.28 billion.

The global markets’ selloff as Italy’s political crisis triggered eurozone exit fears and persistent foreign selling on banks, utility and construction stocks after the Wesak festival holiday pressured the local benchmark index down to a fresh five-month low. The index sank 56.56 points, or 3.2 per cent, to settle at 1,719.28, off the opening high of 1,759.56 and low of 1,709.51, as losers swarmed gainers 995 to 148 on active turnover totalling 3.6 billion shares worth RM4.45 billion.

Stocks recovered in afternoon trade on Thursday, helped by bargain hunting and reduced foreign selling amid a global rebound as the political turmoil in Italy eased. The FBM KLCI rose 21.34 points, or 1.24 per cent, to close at 1,740.62, after ranging between early high of 1,754.44 and low of 1,725.16, as gainers led losers 581 to 409 on robust turnover totaling 4.6 billion shares worth RM9.2 billion.

The index added another 15.76 points, or 0.9 per cent, to end the week at 1,756.38, off an early low of 1,737.72 and high of 1,760.46, as gainers led losers 560 to 377 on reduced turnover totalling 2.88 billion shares worth RM2.79 billion.

Trading range for the blue-chip benchmark index retreated mildly to 84.03 points last week, compared to the huge 96.76 points range the previous week, as foreign buying resurfaced to lift it up significantly from a fresh five-month low. For the week, the FBM EMAS Index lost 304.88 points, or 2.4 per cent, to 12,235.90, while the FBM Small Cap Index dipped another 445.1 points, or 3.1 per cent, to 13,890.06, as small-cap stocks suffered further losses.

On technical momentum indicators, while the trigger line of the daily slow stochastic indicator for the FBM KLCI is hooking up in the oversold zone due to the strong rebound off a five-month low late last week, the weekly indicator eased lower into the bearish region.

The 14-day Relative Strength Index (RSI) has also hooked back up from the oversold region for a reading of 35.23 after the last two trading days’ technical rebound, but the 14-week RSI slipped down to a weaker reading of 37.40 as of last Friday.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) trigger line continued expanding southwards, which is a reinforcement of the bearish weekly MACD indicator. As for the 14-day Directional Movement Index (DMI) indicator, the bearish expansion of the -DI and +DI lines continued on a rising ADX line with a reading above 25, which is confirmation of the existence of a downtrend.

Conclusion

While short-term momentum indicators are hooking up, suggesting further technical rebound upside following last week’s recovery from a selloff to fresh five-month lows, longer term momentum and trend indicators for the FBM KLCI stayed bearish. Hence, further rebound this week is likely to attract profit-taking and selling interest.

On the index, expect multiple overhead resistance coming in at 1,768, 1,780 and next at the 200day moving average level (1,798), while immediate supports are available at the past two trading days’ intra-day lows of 1,738 and 1,725, with crucial support from the December 2017 low of 1,708.

The recovery in the FBM KLCI is still fragile and could be subjected to further downside pressure, if foreign selling resumes, which is likely based on external uncertainties.

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