PROFIT-TAKING LIKELY TO CONTINUE

THE benchmark FTSE Bursa Malaysia Kuala Lumpur Composite Index (FMB KLCI) moved into sideways trade last week, as profit-taking restricted rebound attempts after the much stronger-than-expected first quarter gross domestic product (GDP) growth of 5.6 per cent year-on-year (YoY) was overshadowed by geopolitical worries following a terrorist incident in the United Kingdom.

For the week, the FBM KLCI rose 4.02 points to 1,772.30 as gains on CIMB (+39sen), Hap Seng Consolidated (+26sen) and Genting Malaysia (+22sen) offset losses on BAT (-74sen), Petronas Dagangan (-60sen) and IHH Healthcare (-38sen). Average daily traded volume was slightly lower at 3.24 billion shares worth RM2.88 billion, compared with 3.39 billion shares worth RM3.12 billion previously as buying momentum on the small cap and ACE Market sector fizzled off.

A recovery in crude oil prices last Friday after the initial plunge post-Opec (the Organisation of the Petroleum Exporting Countries) meeting, upward revision in the US first quarter GDP and the still strong double-digit growth of 14 per cent YoY in Chinese industrial profits could cushion downside pressure and contribute towards a positive start this week, but market lacks strong catalysts for the benchmark index to break through the 1,800-psychological barrier.

Oil price recovered by US$0.69 (RM2.95) to US$52.15 per barrel last Friday as disappointments were tempered by Saudi Energy minister’s comment that oil inventories would drop faster in the third quarter and Russia’s statement that producers have more tools to support prices.

If the output cut extension helps reduce global crude inventories to below five-year average by March next year and these producers can agree on a longterm plan to maintain this new equilibrium, we may see Brent crude oil price breaching US$60 per barrel in the second quarter of next year.

This could assist the recoupling of ringgit with crude oil and probably by then the recent decoupling between these two variables, caused by fear of faster than expected monetary tightening in the US, could be mitigated by a stronger-than-expected recovery in the domestic economy.

That aside, investors would be keenly watching the conclusion of first-quarter results reporting season to gauge signs of further upgrades in consensus earnings forecasts for this year and next year that averages about six per cent for FBMKLCI component stocks.

Technical Outlook

The FBM KLCI ended firmer on Monday, led by gains in heavyweight Petronas stocks after the country registered a much stronger-than-expected first quarter GDP growth of 5.6 per cent. The index rose 6.67 points to close at the day’s high of 1,774.95 as gainers led losers 542 to 420 on strong total turnover of 4.09 billion shares worth RM2.95 billion.

On Tuesday, stocks fell 7.78 points to the day’s low of 1,767.17 as losers swarmed gainers 636 to 292 on slower turnover of 2.91 billion shares worth RM2.8 billion.

The index salvaged some gains on Wednesday, helped by bargainhunting interest in banking stocks on the back of strong record first quarter earnings enjoyed by CIMB, offsetting Moody’s downgrade of China’s ratings for the first time in nearly 30 years.

The FBM KLCI gained 3.84 points to 1,771.01 as losers beat gainers 546 to 419 on active trade totalling 3.37 billion shares worth RM2.89 billion. Blue chips ended slightly firmer the subsequent day, lifted by the stronger ringgit and regional peers, after the US Fed minutes indicated a possible delay in raising rates pending more evidence of sustained economic growth.

The FBM KLCI edged 2.95 points up to settle at 1,773.96 but losers beat gainers 590 to 377 on reduced total turnover of 2.94 billion shares worth RM3.17 billion.

Stocks slipped back into profittaking consolidation mode on Friday, taking the cue from weaker regional markets and oil prices as investors were concerned extended output cuts for nine months may not be large enough to offset the global glut. The index eased 1.66 points to 1,772.30 as losers trashed gainers 771 to 208 on slower turnover totaling 2.86 billion shares worth RM2.6 billion.

Trading range for the blue-chip benchmark index last week shrank to 15.43 points, compared with 25.5-point range previous week. The FBM EMAS Index eased 24.30 points to 12,661.58, while the FBM Small Cap Index slumped 265.98 points to 17,576.12 as smallcap stocks fell into profit-taking correction mode.

The daily slow stochastic momentum indicator for the FBM KLCI stayed soft in the neutral region after flashing a bearish divergence signal against the index the previous week, while the weekly indicator continued hooking down in overbought territory. The 14-day Relative Strength Index (RSI) indicator retained the bearish divergence with a hookdown in neutral ground, but the 14-week RSI hooked up to a slightly higher reading of 68.36.

The daily Moving Average Convergence Divergence (MACD) trend indicator remained bearish with a similar bearish divergence clouding the outlook, while the weekly MACD indicator’s signal line is leveling further, suggesting weak upside momentum. However, the 14-day Directional Movement Index (DMI) trend indicator stayed unchanged, with the +DI and –DI lines at a comfortable distance on a leveling ADX line.

Conclusion

More profit-taking consolidation is likely this week as the previous bearish divergence signals on the daily slow stochastics, RSI and MACD indicators for the FBM KLCI have yet to be neutralised by a confirmed penetration of the recent two-year high of 1,787 to the upside. In the meantime, support building at current levels or slightly lower will be crucial to instill confidence and encourage investors to bargain hunt for recovery ahead.

Immediate uptrend supports for the index stays at the rising 30- and 50-day moving average levels, now at 1,763 and 1,756, with better support at 1,740, then 1,729. Immediate upside hurdle for the benchmark stays at the recent two-year high of 1,787, followed by the 1,800-psychological level and May 18 2015 high of 1,823.

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

If the output cut extension helps reduce global crude inventories to below five-year average by March next year and these producers can agree on a longterm plan to maintain this new equilibrium, we may see Brent crude oil price breaching US$60 per barrel in the second quarter of next year.