INDEX LIKELY TO SEE CONSOLIDATION

OVERBOUGHT momentum and profittaking capped a strong rally on the local benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) to the 1,800 level last week as cautious sentiment prevailed amid global trade tensions due to the United States’ import tariffs on its allies, and ahead of the Group of Seven (G7) summit over the weekend.

Oil and gas (O&G)-related stocks led earlier gains as global oil prices firmed on outlook for supply disruptions and geopolitical risks, and investor optimism over recent reform measures on the domestic political and economic front.

For the week, the FBM KLCI rose 21.94 points, or 1.25 per cent, to 1,778.32, as gains on Hong Leong Financial Group (+RM1.04), Public Bank Bhd (+60 sen), RHB Bank Bhd (+46 sen) and Petronas Dagangan Bhd (+30 sen) offset falls on Nestle Bhd (-RM1.10) and Sime Darby Bhd (12 sen). Average daily traded volume and value last week were at 3.23 billion shares worth RM2.84 billion, compared with 3.32 billion shares and RM4.7 billion, respectively, the previous week.

This Hari Raya holiday-shortened week holds many important meetings that could influence market direction. Regardless of the outcome, the FBM KLCI is expected to be in a lacklustre mode ahead of the festive holidays.

What will transpire in the US monetary policy meetings tomorrow and Wednesday will have important ramifications on emerging markets as it would affect foreign fund flows.

The European Central Bank’s (ECB) meeting that follows two days later may not help to alleviate the bearish sentiment if policymakers take an aggressive view in ending the €30 billion (RM141 billion) a month bond-buying programme post September’s deadline.

Although current consensus expectations point to Bank Negara Malaysia maintaining its interest rate for the rest of this year, nothing is cast on stone. For the moment, the attractive 126basis-point yield spread between the 10-year Malaysian Government Securities and US Treasury act as a strong support for the ringgit, but the tightening bias in the US could narrow the difference and induce an outflow.

Any decision to raise interest rate on the local front to curb outflows should benefit the banking sector, due to expansion in margin, and cash rich companies, but it will affect negatively cyclical sectors like property, automotive, consumers and highly indebted companies.

For now, the automotive and consumer-related sectors will enjoy the benefit of zero-rated Goods and Services Tax until endAugust, pending further details on the Sales and Services Tax that should be forthcoming before its implementation on September 1.

Technical Outlook

Bursa Malaysia shares were in range-bound trading last Monday. The FBM KLCI eased 1.21 points to 1,755.17, after falling from the opening high of 1,761.61 and low of 1,745.75 as gainers edged losers 477 to 444 on moderate turnover of 2.76 billion shares worth RM2.82 billion.

Stocks ended mixed the next day with profit-taking and selling stalling recent rebound gains. The FBM KLCI ended flat at 1,755.14, after trading between an early low of 1,747.76 and high of 1,756.77 as gainers led losers 534 to 369 on total turnover of 2.72 billion shares worth RM2.69 billion.

Blue chips rose on Wednesday, with gains picking up pace in afternoon trade. The FBM KLCI climbed 21.99 points to 1,777.13, off an early low of 1,751.03 and high of 1,778.47 as gainers swarmed losers 716 to 267 on robust turnover of 3.5 billion shares worth RM3.02 billion. Blue chips extended gains the following day.

The FBM KLCI added 8.68 points to close at 1,785.81, off an early low of 1,778.23 and high of 1,801.42 as gainers led losers 597 to 357 on active trade totalling 4.06 billion shares worth RM3.25 billion.

On Friday, the local market fell in line with the region. The index gave back 7.49 points to settle the week at 1,778.32, after oscillating between an early high of 1,789.20 and low of 1,772.90 as losers edged gainers 537 to 415 on total trade of 3.09 billion shares worth RM2.41 billion.

Trading range for the blue-chip benchmark index shrank to 55.67 points last week, compared with the 84.03 points range the previous week, helped by the sharp intra-day rally to the 1,800-level on Thursday prior to a profit-taking dip.

For the week, the FBM Emas Index regained 237.17 points, or 1.94 per cent, to 12,473.07, while the FBM Small Cap Index surged 568.84 points to 14,458.90 as small-cap stocks bounced back from recent heavy losses.

Following last week’s rebound, the daily slow stochastic indicator for the FBM KLCI recovered from oversold to the neutral region, but the weekly indicator continued on its path lower, albeit on reducing downward momentum.

The 14-day Relative Strength Index (RSI) indicator hooked back down for a reading of 42.82 due to Friday’s profit-taking dip, but the 14-week RSI retained a hook-up with a healthy reading of 42.26.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) is poised to trigger a buy signal on further strength, but the bearish weekly MACD indicator’s position remains intact. As for the 14-day Directional Movement Index (DMI) indicator, the contraction of the -DI and +DI lines on a levelling Average Directional Index line implies the current downtrend momentum is easing.

Conclusion

Mixed signals from technical momentum and trend indicators for FBM KLCI imply that the index may ease back into consolidation mode this week. Trading momentum should also slow down a notch as investors are likely to stay on the sidelines and await clearer leads from the G7 summit over the weekend, the ECB and US monetary policy meetings this week.

On the index, immediate resistance rests at 1,802, last Thursday’s high, and matching the 50 per cent Fibonacci Retracement (FR) of the December last year’s low of 1,708 to the April high of 1,896, followed by the 38.2 per cent FR (1,824) and 23.6 per cent FR (1,852). Immediate supports are from the recent intra-day lows of 1,751, 1,738 and 1,725, with crucial support from the December last year low of 1,708.

This Hari Raya holiday-shortened week holds many important meetings that could influence market direction. Regardless of the outcome, the

FBM KLCI is expected to be in a lacklustre mode.

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