O&G STOCKS MAY CONTINUE TO SHINE

THE FTSE Bursa Malaysia KLCI (FBM KLCI) managed to push above 1,880 to challenge record highs last week, helped largely by a surge in heavyweight oil and gas (O&G) counters as global oil markets firmed following top Organisation of the Petroleum Exporting Countries (Opec) member Saudi Arabia’s outlook that prices may top US$100 (RM389) a barrel and fears the United States may reimpose trade sanctions on Iran next month.

However, profit-taking interest on small caps forced a pullback on Friday, given the absence of follow-through buying momentum ahead of the weekend.

For the week, the local benchmark advanced another 19.28 points, or 1.03 per cent, to 1,887.75, with Petronas Dagangan Bhd (+RM2.12), Petronas Gas Bhd (+58 sen), PPB Group Bhd (+52 sen), Hong Leong Bank Bhd (+50 sen) and Hong Leong Financial Group (+38 sen) dominating gains. Average daily traded volume and value retraced to 2.61 billion shares and RM2.33 billion last week, compared with the 3.32 billion shares and RM2.51 billion average, respectively, the previous week.

At 1,896.03, the FBM KLCI almost surpassed the all-time high of 1896.2 last week before retreating. Although momentum indicators are showing profittaking bias in the immediate term, the healthy consolidation is necessary for the benchmark index to trend higher, especially immediately after the 14th General Election, assuming there is no change in the power base.

A jubilant mood could easily cause the 1,900-barrier to be broken before testing the 1,950 level. Continued uptrend in crude oil prices could solidify the positive trend due to its contribution in reducing budget deficit and its high correlation with the ringgit’s strength. Concerns about trade dispute could return strongly post-election.

Economic data-wise, the advance estimate of the US firstquarter gross domestic product is due on Friday.

Actual annual rate of growth could come in lower than the consensus forecast of 2.1 per cent and fourth quarter of last year’s 2.9 per cent due to softer private consumption, private investment and exports.

Technical Outlook

The local benchmark index closed at a fresh near four-year high on Monday, helped by late strength in key index heavyweights, but the broader market was mixed on profit-taking. The FBM KLCI ended up 10.29 points at the day’s high of 1,878.76, off an early low of 1,876.21, but losers edged gainers 518 to 409 on total turnover of 2.67 billion shares worth RM2.06 billion.

The local blue-chip benchmark closed at a new near four-year high the next day, while small caps consolidated on profit-taking interest. The FBM KLCI added 1.73 points to close at 1,880.49, off an early low of 1,873.09 and high of 1,885.12, but losers again edged gainers 506 to 424 on higher turnover of 3.09 billion shares worth RM2.79 billion.

Blue chips eased lower on Wednesday. The FBM KLCI slipped 1.17 points to close at 1,879.32, off an early high of 1,884.84 and low of 1,873.11 as losers trumped gainers 617 to 285 on slower turnover of 2.33 billion shares worth RM1.97 billion. Core index heavyweights surged in late session the subsequent day. The index was up 15.86 points for a record closing high of 1,895.18, off an early low of 1,883.65 as gainers led losers 505 to 374 on improved trade totalling 2.51 billion shares worth RM2.68 billion.

Profit-taking forced the local benchmark to pull back from a record high early on Friday, given the absence of follow-through buying from the previous session and weak market breadth. The index slid 7.43 points to end the week at 1,887.75, off an early high of 1,896.03 and low of 1,883.82 as losers beat gainers 668 to 272 on moderate trade totalling 2.43 billion shares worth RM2.16 billion.

Trading range for the key index shrank to 28.82 points last week, compared with the wide 40.48point range the previous week as profit-taking checked the strong surge to re-visit record highs. For the week, the FBM Emas Index edged 39.02 points, or 0.3 per cent, higher to 13,168.54, but the FBM Small Cap Index dipped 236.15 points, or 1.56 per cent, to 14,890.96 as profit-taking interest forced small-cap stocks to stage retracement.

Due to last week’s surge, the daily slow stochastic momentum indicator for the FBM KLCI is deep in overbought territory but is hooking down following last Friday’s pullback, while the weekly indicator hooked back up for a mild buy signal in the overbought zone. The 14-day Relative Strength Index (RSI) hooked down for a reading of 61.09 after last Friday’s dip from record highs, but the 14-week RSI retained its hook-up with a robust reading of 65.89.

In the meantime, the daily Moving Average Convergence Divergence (MACD) trend indicator registered bullish expansion above the zero line while the weekly MACD indicator’s signal line re-hooked upwards to renew upside momentum. As for the 14day Directional Movement Index (DMI) indicator, the +DI and –DI lines expanded positively on a rising Average Directional Index line, suggesting a return to uptrend mode.

Conclusion

Trend indicators on the FBM KLCI have improved considerably following last week’s surge to test record highs, but shortterm overbought momentum, specifically on the daily and weekly slow stochastics indicators, suggests that a profit-taking pullback is required to neutralise overbought technical conditions.

In the meantime, O&G stocks may continue to outperform, given the stubbornly high global crude oil prices lifted by rising geopolitical risks from the Syrian conflict, potential Iran trade sanctions renewal next month and robust demand from China.

Immediate uptrend supports on pullbacks are from the rising 10- and 30-day moving averages at 1,874 and 1,861, respectively, followed by the 50-day moving average (1,855). Looking ahead, a convincing breakout above the 1,896 high should aim for 1,921, the 123.6 per cent Fibonacci Projection (FP) of the December last year low (1,708) to the 1,880 peak, with next target at 1,946, the 138.2 per cent FP.

A jubilant mood could easily cause the 1,900-barrier to be broken before testing the 1,950 level. Continued uptrend in crude oil prices could solidify the positive trend due to its contribution in reducing budget deficit and its high correlation with the ringgit’s strength.

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