NEED FOR STRONGER BUYING SUPPORT

THE initial foreign selling on Bursa Malaysia after a long weekend holiday break last week, on concerns over a worsening United States-China trade war, was subsequently offset by a strong two-day rebound as reduced trade tensions, recovery in oil and gas-related stocks and Morgan Stanley’s rating upgrade on Malaysia helped reverse negative sentiment.

Week-on-week, the local benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) rose 4.59 points, or 0.26 per cent to 1,803.76, as gains in CIMB (+31 sen), Petronas Gas (+18 sen) and DiGi.com (+ 17sen) helped offset losses in Hartalega (-28 sen), IHH Healthcare (- 22 sen) and Hong Leong Bank (- 20 sen).

Average daily traded volume last week recovered marginally to 2.43 billion shares worth RM2.62 billion, compared with 2.33 billion shares worth RM2.03 billion in the previous week.

The FBM KLCI recovered from the unexpected volatility on Wednesday to end the week on positive note. This was in line with improved regional market sentiment after the US announced another round of talks with China to resolve trade conflicts.

However, hardly a day after that, it appeared that US President Donald Trump has instructed his aides to proceed with tariffs on about US$200 billion more of Chinese products. If this is true, market volatility should prevail. Unless it can strike a favourable deal with China, the US is likely to prolong this matter until its mid-term elections in November is over, as any attempts to rush through a deal that appears unfavourable could backfire on the Republican Party.

The odds are high for trade tensions to last as China’s trade surplus with the US widened to a record high of US$31.05 billion last month.

Malaysian exporters, especially those in the technology sector, can be in the limelight again if the US goes ahead with the US$200 billion tariff plan. Technology stocks have enjoyed steady increases since April.

A weak ringgit, which can approach 4.20 against the US dollar soon, is another catalyst. Technology, palm oil and glove players should be the main beneficiaries in the short term, but the shine should wane in the long run as trade war is a “lose-lose” game that will lead to higher inflation and demand destruction.

A weak ringgit, a stronger outlook for crude oil prices and the onset of El Nino could be favourable for plantations stocks. As the fourth quarter usually reflects a seasonal recovery in crude palm oil prices, these stocks could witness a re-rating in October.

This week’s key economic data in the US, such as housing starts, building permits and Purchasing Managers’ Index, are likely to indicate sustained strength in its economy. This will act as a prelude to the Federal Reserve’s rate hike decision (potentially by 25 basis points) later this month and possibly further weakness in emerging market currencies.

Technical Outlook

Bursa Malaysia shares slumped on Wednesday after a four-day weekend holiday break, as foreign selling resumed on concerns over a worsening US-China trade war and contagion from tumbling emerging market currencies. The FBM KLCI fell 13.92 points to close at 1,785.25, off an early high of 1,822.68 and low of 1,780.91, as losers swarmed gainers 896 to 166 on total turnover of 2.23 billion shares worth RM2.8 billion.

Shares recovered the next day as hopes for renewed trade talks between the world’s two largest economies helped lessen negative sentiment. The FBM KLCI gained 7.35 points to close near session highs of 1,792.60, off an early low of 1,777.45, as gainers edged losers 478 to 405 on improved turnover of 2.38 billion shares worth RM2.57 billion.

Stocks bounced back strongly on Friday, boosted by reduced US-China trade tensions, rebound in oil and gas-related counters, and after Morgan Stanley upgraded Malaysia to “equal weight”. The key index climbed 11.16 points to end the week at 1,803.76, off an opening low of 1,789.60 and high of 1,804.89, as gainers led losers 589 to 302 on more active trade totaling 2.68 billion shares worth RM2.48 billion.

The FBM KLCI’s trading range expanded to 45.23 points last week, compared with 27.73 points in the previous week, as foreign selling on Wednesday depressed it down to a near one-month low.

On momentum indicators, the daily slow stochastics for the FBM KLCI is hooking up from the lower neutral region, but the weekly indicator is flattening at the overbought zone. The 14-day Relative Strength Index (RSI) indicator has hooked up back above the 50 mid-point mark, but the 14-week RSI indicator stayed level in the neutral region.

On trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line is still leveling off due to weak upside momentum, while the weekly MACD indicator’s ascent is also losing upward momentum. Meantime, the 14-day Directional Movement Index (DMI) trend indicator managed to sustain a positive stance, with the +DI and DI lines in expansion mode on a rising ADX line.

Conclusion

Last week’s rebound from a selloff has lifted short-term momentum indicators into positive mode, implying further gains ahead, but medium-term indicators stayed neutral, suggesting that more follow-through strength in buying momentum is needed for a convincing recovery. On the external front, persistent threats from the US president to impose more tariffs should keep investors sidelined and cautious, pending more clarity.

On the index, immediate overhead resistance will be the upper Bollinger band at 1,828, with stronger hurdles from 1,851, the 23.6 per cent FR level of the April 2018 high of 1,896 to the December 2017 low of 1,708, followed by 1,867 and 1,880. Important uptrend supports are at 1,797 and 1,768, the respective 30- and 50day moving averages, while key retracement supports are at 1,780 (61.8 per cent FR) and 1,752 (76.4 per cent FR).

Blue chips, such as Gamuda, Genting Bhd, Genting Malaysia and Sime Darby, should stay at depressed levels given the weak buying momentum, while chip exporters like Globetronics and Inari Amerton are likely to undergo further profit-taking corrections.

Medium-term indicators stayed neutral, suggesting that more followthrough strength in buying momentum is needed for a convincing recovery.

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