BEARISH TREND LIKELY TO CONTINUE

THE local benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) lost further ground last week. Stock prices came under pressure post first-half windowdressing as investors turned cautious ahead of the deadline by the United States to impose initial trade tariffs on US$34 billion (RM137.7 billion) worth of Chinese imports.

The absence of any compromise after US import tariffs on China kicked in on Friday raised fears over the increased possibility for an escalating tit-for-tat trade war, which sparked selling ahead of the weekend.

For the week, the FBM KLCI fell 27.64 points, or 1.63 per cent, to 1,663.86, with Public Bank Bhd (-84 sen), Hong Leong Financial Group (-62 sen), KLCC Property Holdings Bhd (-38 sen), Petronas Gas Bhd (-38 sen) and Tenaga Nasional Bhd (-38 sen) contributing most to the loss. Average daily traded volume last week was 2.01 billion shares worth RM1.67 billion, compared with 1.94 billion shares value at RM2.1 billion in the previous week.

Last week’s sell-off was driven almost entirely by the implementation of a 25 per cent tariff hike by the US on its imports from China, beginning on Friday.

Yuan devaluation will weaken other currencies in the region as well for them to remain competitive against China. This expectation could postulate greater outflows of foreign funds from China and the emerging markets.

As China and the US are Malaysia’s key trading partners, current negative market sentiment may not abate anytime soon with foreigners continuing to exit. As far as Malaysia’s equity market is concerned, foreigners have been net sellers since the beginning of last month, except on the last trading of last month for window-dressing purposes.

Foreign selling will continue to exert downside pressure on the benchmark index, but the selling is expected to ease as the weeks go by, with most of the net inflows last year finding their way out and valuation beginning to look attractive.

On Friday’s close, the FBM KLCI was trading at consensus calendar year 2019 price-to-earnings ratio of 14.8 times, still about eight per cent premium to comparable developing markets’ 13.7 times. As such, we may witness further weaknesses in the benchmark index before buyers return to bargain hunt.

Meanwhile, Bank Negara Malaysia is likely to maintain its Overnight Policy Rate at 3.25 per cent when it meets on Wednesday.

Although exports growth, in US dollar terms, is expected to narrow to 9.5 per cent from 12.6 per cent a month ago, trade surplus is forecast to be stronger at US$27 billion versus US$24.9 billion a month ago due to sharper pullback in imports.

Technical Outlook

Bursa Malaysia shares fell last Monday on post first-half window-dressing profit-taking and selling. The FBM KLCI slipped 6.45 points to close at 1,685.05, off an early high of 1,697.15 and low of 1,677.33 as losers beat gainers 505 to 342 on subdued trade, which totalled 1.7 billion shares worth RM1.62 billion.

Stocks ended lower the next day, dampened by post-windowdressing profit-taking. The FBM KLCI shed another 4.68 points to end at 1,680.37, off an early high of 1,689.91 and low of 1,674.11, as losers beat gainers 447 to 351 on increased turnover of 2.13 billion shares worth RM1.66 billion.

While regional markets traded lower on Wednesday, the local market rebounded on mild bargain hunting support. The FBM KLCI gained 8.08 points to settle at 1,688.45, off an early low of 1,680.61 and high of 1,690.56 as gainers led losers 497 to 322 on steady turnover of 2.03 billion shares worth RM1.63 billion.

Stocks traded sideways the subsequent day. The FBM KLCI gained 2.2 points to close at 1,690.65, off an early high of 1,691.62 and low of 1,682.35 as losers edged gainers 452 to 405 on total turnover of 2.17 billion shares worth RM1.44 billion.

Blue chips slumped on Friday, with banks and plantation stocks leading falls. The index tumbled 26.79 points to end at the day’s low of 1,663.86, off the opening high of 1,694.81 as losers swarmed gainers 539 to 286 on total traded volume of 2.01 billion shares worth RM2 billion.

Trading range for the blue-chip benchmark index shrank further to 33.29 points last week, compared with the 49.24 points range in the previous week, as it struggled but failed to recover from five-month lows as foreign selling pressure persisted. For the week, the FBM Emas Index slipped 161.94 points to 11,798.99, while the FBM Small Cap Index dropped 121.19 points to 13,891.31 as small-cap stocks deteriorated further on lacking retailers’ commitments.

Given last Friday’s index selloff, the daily slow stochastic momentum indicator hooked back down after a mild recovery from the oversold region, while the weekly indicator travelled further south into the oversold zone. The 14-day Relative Strength Index (RSI) indicator also hooked back down nearer to the oversold region, while the 14-week RSI dipped to a moderate oversold reading of 28.48 as of last Friday.

On trend indicators, the signal line on the daily Moving Average Convergence Divergence (MACD) levelled after crossing for a buy in the early part of last week, but the weekly MACD indicator’s signal line continued heading south deeper into bearish territory. On the 14-day Directional Movement Index (DMI) indicator, the -DI and +DI lines expanded away on a high average directional index line reading, suggesting the downtrend is still intact.

Conclusion

The local market should suffer further losses early this week following last Friday’s severe sell-off, which saw momentum indicators weakening further and trend indicators signalling a continuation of current bearish trend.

Key retracement supports for the index will be the 138.2 per cent FP (1,636) of the April high of 1,896 to the December 2017 low of 1,708, with the 150 per cent FR (1,614) matching the November 2016 pivot low acting as crucial support. Next stronger support will be the 161.8 per cent FP (1,592). Immediate overhead resistance will be at 1,708, next at 1,729, followed by 1,752 and 1,780, the respective 76.4 per cent FR and 61.8 per cent FR levels, and then 1,802, the recent pivot high matching the 50 per cent FR.

As China and the US are Malaysia’s key trading partners, current negative market sentiment may not abate anytime soon with foreigners continuing to exit.

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