INDEX MAY PAUSE FOR CONSOLIDATION

THE local blue-chip benchmark FTSE Bursa Malaysia KLCI (FBM KLCI) recovered last week encouraged by the more upbeat external tone, after the United States central bank chief cued for a pause in further raising interest rates.

Cautious optimism following conclusion of the US-China trade talks in Beijing, firmer ringgit and oil price trend fuelled buying momentum in lower liners and small caps as retail participation increased substantially, specifically in the technology and oil and gas sectors.

For the week, the FBM KLCI was up 13.44 points, or 0.8 per cent, at 1,683.22, as losses in Hartalega Holdings Bhd (-RM1.07), Top Glove Bhd (-68 sen) and Petronas Chemicals Group Bhd (56 sen) were offset by gains in Genting Bhd (+52 sen), Tenaga Nasional Bhd (+40 sen), Sime Darby Bhd (+30 sen), IHH Healthcare Bhd (+29 sen) and Genting Malaysia Bhd (+23 sen).

Average daily traded volume and value last week improved significantly to 2.83 billion shares worth RM2.26 billion, compared with 1.8 billion shares and RM1.2 billion, respectively, the previous week, mostly due to the substantial increase of trading participation in lower-priced second liners and small-cap stocks.

Improvement in external news flows, stronger crude oil price and a weaker US dollar led to the strength in the ringgit that convinced foreign investors to turn net buyers in the last three working days of last week, after exiting the local scene in a big way last year.

While last week’s recovery in the benchmark index implied healthy undercurrents to drive a potential pre-Chinese New Year rally, blue chips could congest sideways early this week while small cap and lower liners enjoy rotational plays as investor sentiment could turn fragile again ahead of a vote in British parliament over Brexit agreement tomorrow.

Brexit aside, the weak US December inflation data and the prolonged government shutdown over wall funding stalemate should continue to undermine a recovery in the US dollar.

Technical Outlook

Bursa Malaysia shares rose on Monday, lifted by the previous Friday’s strong rally in the US. The FBM KLCI climbed 9.39 points to close at 1,679.17, off an early high of 1,687.13 and low of 1,673.03 as gainers led losers 604 to 294 on robust turnover of 2.5 billion shares worth RM1.92 billion.

Stocks closed lower the next day on profit-taking. The FBM KLCI fell 6.41 points to 1,672.76, off an early high of 1,686.37 and low of 1,670.67 as losers edged gainers 404 to 366 on total trade of 2.31 billion shares worth RM2.03 billion.

While blue chips ended lower on Wednesday, lower liners and small caps attracted bargain hunters. The FBM KLCI slipped 4.93 points to close at the day’s low of 1,667.83, off an earlier high of 1,684.08, but gainers led losers 678 to 258 on robust turnover of 3.02 billion shares worth RM2.51 billion.

Local fund support aided the FBM KLCI to close firm the following day. The index climbed 11.05 points to settle at 1,678.88, off an early high of 1,681.23 and low of 1,669.28 as gainers matched losers at 435 on very strong total turnover of 3.45 billion shares worth RM2.66 billion.

Sentiment improved further on Friday, largely aided by the more upbeat external tone, firmer ringgit and oil price trend. The index added 4.34 points to end the week at 1,683.22, after moving between an opening high of 1,684.99 and low of 1,676.75 as gainers led losers 569 to 294 on total turnover of 2.89 billion shares worth RM2.17 billion.

Trading range for the blue-chip benchmark index shrank to 19.3 points last week, compared with the 35.03-point range the previous week, after profit-taking on rubber glove makers restricted upside on the index. For the week, the FBM Emas Index rose 205.01 points, or 1.8 per cent, to 11,618.03, while the FBM Small Cap Index surged 771.1 points to 12,104.83, with strong buying momentum in small caps fuelling rallies.

On technical momentum indicators for the FBM KLCI, the daily slow stochastics has eased into the neutral zone and is hooking up due to the late-week recovery, while the weekly indicator’s signal line resumed higher to strengthen its upward momentum.

The 14-day Relative Strength Index (RSI) indicator improved to a positive reading of 52.19, while the 14-week RSI indicator hooked back up to a stronger reading of 41.00.

As for trend indicators, the daily Moving Average Convergence Divergence (MACD) signal line also turned higher to support a hook-up on the weekly MACD’s trigger line, implying a return of bullish momentum.

In the meantime, the -DI and +DI lines on the 14-day Directional Movement Index (DMI) trend indicator whipsawed on a falling ADX line, suggesting the absence of a definite trend.

Conclusion

The local benchmark index should pause for consolidation this week following recovery on technical momentum indicators after last week’s choppy sessions, but the more positive external sentiment from cues that the US central bank may stall raising interest rates and even reverse its balance-sheet reduction plan, if global economic growth falters should provide a boost.

The potential for a deal after the recent conclusion of mid-level US-China trade talks and recovery in global oil prices and ringgit should also support further recovery, with the lower liners and small caps space showing renewed upside vigour.

On the index, it requires a convincing breach above immediate resistance from the 1,700 psychological level to fuel upside momentum towards subsequent resistance from 1,722, 1,742 and 1,762, the respective 61.8 per cent Fibonacci Retracement (FR), 50 per cent FR and 38.2 per cent FR of the rise, from 1,657 low on June 28 to the 1,826.9 high of August 28. Immediate support stays at the June last year’s low of 1,657, with crucial supports still at the December 18 low of 1,626, followed by 1,617, the 123.6 per cent (Fibonacci Projection) FP level, and 1,593, the 138.2 per cent FP.

Improvement in external news flows, stronger crude oil price and a weaker US dollar led to the strength in ringgit that convinced foreign investors to turn net buyers in the last three working days of last week.

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