PROFIT-TAKING CONSOLIDATION LIKELY

THE local benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) managed to add on to gains last week, but optimism over the United States-European Union trade deal and China’s economic stimulus plans were overshadowed by lingering US-China trade tensions and profit-taking ahead of the weekend.

Construction-related stocks outperformed, with the sector index surging 3.3 per cent last Monday. Oil and gas-related stocks also attracted buyers after US oil inventories fell more than expected the previous week, easing oversupply concerns.

For the week, the FBM KLCI added 14.47 points to 1,769.14, with gains in Petronas Dagangan Bhd (+RM1.06), Petronas Gas Bhd(+64 sen), MISC Bhd (+29 sen), Tenaga Nasional Bhd (+28 sen) and Hong Leong Bank Bhd (+26 sen) offsetting falls in Nestle Bhd (-50 sen) and Hong Leong Financial Group (-20 sen). Average daily traded volume and value last week increased to 3.12 billion shares worth RM2.46 billion, compared with 2.68 billion shares and RM2.37 billion, respectively, the previous week, due to improved trading interest in cheaper-priced lower liners and smallcap stocks.

This is a crucial week as many key central banks, including the US and Japan, will hold their monetary policy meetings while a slew of important key economic data are due for announcements.

As there are rumours about a potential shift in Japan’s monetary policy due to its failure in boosting inflation, investors will be watching closely the outcome of Bank of Japan’s meeting today and tomorrow. In the interim period, the FBM KLCI could be subjected to profit-taking pressure after staging a strong rebound in the last three weeks.

On the US front, the United States Federal Reserve is unlikely to tweak its current target rate of 1.75 to two per cent in the Tuesday and Wednesday meetings. It could pause to gauge the impact of ongoing trade war between the US and China that could only be visible in the coming quarters.

China’s purchasing managers’ index for this month will be released this week. It could provide some clue on the impact of trade war on its manufacturing and services sectors. Malaysia’s trade numbers for last month are also due on Friday. They are not expected to have significant impact on the market direction.

Technical Outlook

Most stocks were in profit-taking consolidation mode last Monday. The FBM KLCI rose 3.29 points to close at 1,757.96, off an early low of 1,749.95 and high of 1,760.84 as gainers led losers 551 to 354 on robust trade totalling 3.13 billion shares worth RM2.24 billion. Construction and property-related stocks led gains the next day. The FBM KLCI added 4.97 points to settle at 1,762.93, off the opening low of 1,756.90 and high of 1,764.57 as gainers led losers 574 to 383 on active trade totalling 3.34 billion shares worth RM2.68 billion.

As construction and property stocks stalled on profit-taking on Wednesday, oil and gas-related stocks attracted buyers. The FBM KLCI rose 0.85 point to 1,763.78 after oscillating between an opening low of 1,760.77 and high of 1,766.05 as gainers led losers 543 to 386 on stronger trade totalling 3.75 billion shares worth RM2.69 billion.

Stocks closed softer on followthrough profit-taking the subsequent day. Still, the FBM KLCI ended 2.45 points up at 1,766.23, off an early high of 1,769.22 and low of 1,762.15 as losers beat gainers 618 to 335 on robust turnover of 3.03 billion shares worth RM2.73 billion.

The market extended consolidation on Friday. The index added 2.91 points on a lastminute spurt to close at the day’s high of 1,769.14, off an earlier low of 1,760.25 as losers edged gainers 511 to 382 on slower turnover totalling 2.33 billion shares worth RM1.98 billion.

Trading range for the blue-chip benchmark index shrank substantially to 19.27 points last week, compared with the wide 46.98-point range the previous week, key blue-chip index heavyweights slipped into profit-taking consolidation mode. For the week, the FBM Emas Index rose 137.97 points to 12,558.28, while the FBM Small Cap Index added 311.05 points to 14,870.64 as small-cap stocks remained active on keen rotational trading plays.

The daily slow stochastic momentum indicator for the FBM KLCI remained elevated in the extreme overbought region, thanks to the index’s persistent strength that rose in 14 of the past 15 trading days. The weekly indicator has issued a buy signal just above the oversold borderline the previous week, suggesting bullish medium-term potential. The 14-day Relative Strength Index (RSI) indicator also retained its upward momentum, while the positive stance on the 14-week RSI indicator reinforces the positive daily signal.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line extended rise above the neutral mark to imply strengthening uptrend, while the weekly MACD indicator’s signal line hook-up remains to reinforce the bullish daily signal. On the 14-day Directional Movement Index (DMI) indicator, the +DI and -DI lines expanded after flashing a “buy” the previous week, with the average directional index line turning up, supporting uptrend resumption.

Conclusion

As short-term technical momentum indicators remain elevated, the local benchmark index should lose upside momentum and be prone for overbought correction after the recent strong rebound leg from a 17-month low. A profit-taking consolidation will most likely persist this week as stocks consolidate their strong gains from the late-June sell-off, pending the next catalyst. On the external front, poor earnings from top US technology companies should spill over to dampen sentiment and encourage profittaking in semi-conductor exporters.

On the index, immediate overhead resistance stays at 1,780, the 61.8 per cent Fibonacci Retracement (FR) level of the April high of 1,896 to the December last year low of 1,708, and then 1,801, the June 7 pivot high matching the 50 per cent FR. Next hurdle will be at 1,824, the 38.2 per cent FR level. On the flipside, immediate chart supports are at 1,740, then 1,729/1,720 and 1,708/1,700, followed by 1,680.

As there are rumours about a potential shift in Japan’s monetary policy due to its failure in boosting inflation, investors will be watching closely the outcome of Bank of Japan’s meeting today and tomorrow.

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