Index inches along on minor nibbling

by **Cals** Sun 29 May 2016, 23:45

Index inches along on minor nibbling

By Lee Cheng Hooi / The Edge Financial Daily | May 27, 2016 : 11:15 AM MYT
This article first appeared in The Edge Financial Daily, on May 27, 2016.

US equity markets ended firmer on Wednesday as financial and energy stocks led the American indices up despite the spectre of the Federal Reserve Bank’s potentially higher interest rates by mid-June. News that debt-laden Greece has managed to unlock a further €10.3 billion (RM46.98 billion) in loans from its international creditors in Brussels also lifted market sentiment. The Dow rose 145.46 points to 17,851.51, while the S&P 500 gained 14.48 points to end at 2,090.54.

The FBM KLCI inched up despite a narrower range of 16.74 points traded for the week with sluggish volumes of 1.47 billion to 1.73 billion shares traded. The index closed at 1,631.09 yesterday, up 0.13 of a point from the previous day as blue-chip stocks such as Kuala Lumpur Kepong Bhd, RHB Capital Bhd, Petronas Dagangan Bhd, Petronas Gas Bhd and PPB Group Bhd caused the index to inch on minor nibbling activities. The ringgit was steady against the US dollar at 4.0850 as Brent crude surged to US$49.50 per barrel.

The FBM KLCI rose on a rally from the 801.27 low (October 2008) to its 1,896.23 all-time high (July 2014) and it represents an extended Elliott Wave “flat” rebound in a “pseudo-bull” rise completed. The next few months’ index price movements since July 2014 comprised key swings of 1,671.82 (low), 1,867.53 (high), 1,503.68 (low), 1,727.41 (high), 1,600.92 (low) and 1,729.13 (high).

The index managed to surpass the key 62% Fibonacci retracement (FR) level of 1,728.54 to a recent high of 1,729.13 on April 14, 2016. Very heavy liquidation at that level had caused the index to decline and move into a downward phase for its 20-day and 50-day simple moving averages (SMAs) with a “dead cross” on its short-term daily chart.

The index’s price bars are now below the 50-day and 200-day daily SMAs and this depicts a downward phase for the FBM KLCI in the medium to longer term. Medium- to longer-term prospects look bleaker as the weekly 50-day and 200-day SMAs also issued a “dead cross” in November 2015. Any bargain hunting on the index will be met by heavy longer-term selling on rallies.

The index’s daily signals are mixed, with its Commodity Channel Index (CCI), Directional Movement Index (DMI) and oscillator all depicting very obvious “sell” signals. The moving average convergence divergence (MACD) and stochastic indicators have turned “positive”. As such, the index’s weaker support levels are seen at 1,595, 1,611 and 1,621, while very heavy liquidation at the resistance areas of 1,631, 1,700 and 1,729 will cap the index’s rise. The daily downside targets for the index are located at 1,569 and 1,527.

All rebounds on the index to its 23%, 38%, 50% and 62% FR clusters of 1,639.57, 1,653.76, 1,656.69, 1,666.69, 1,670.52, 1,679.62 and 1,684.35 would be met with very obvious longer-term selling and liquidation activities.

Due to the very weak tone for the FBM KLCI, we are recommending a chart “sell” on UMW Holdings Bhd (UMW). The company manufactures light and heavy equipment for industrial, construction and agricultural sectors. It also imports, assembles and markets passenger and commercial vehicles, and related spare parts, as well as has interests in the oil and gas industries.

A check on the Bloomberg consensus reveals that 17 research houses cover this stock, with four “hold” and 13 “sell” calls. Maybank Investment Bank Bhd covers UMW on a fundamental basis, with a “sell” call and a sum-of-parts target price of RM4.50. Its subsidiary, UMW Toyota Motor Sdn Bhd, recently confirmed plans to build a new RM2 billion plant in Bukit Raja, Klang. Given the high capital expenditure for this plant, this foray could weaken UMW’s stretched balance sheet at 55% net gearing even further.

UMW’s chart trend on the daily, weekly and monthly time frames is firmly down. From a weekly Wave 5 and all-time high of RM14.23 (May 2013), its prices have plunged 64.9% on the daily, weekly and monthly time frames to a weekly Wave 3 low of RM5 (May 2016).

As prices broke above their recent key critical support levels of RM6.25 and RM6.54, look to “sell” UMW on any rallies to its resistance areas as the moving averages depict a very firm short- to long-term downtrend for this stock. The daily, weekly and monthly indicators (like the CCI, DMI, MACD, oscillator and stochastic) have issued clear “sell” signals and now show firm and obvious indications of UMW’s eventual plunge towards much lower levels.

It would attract very weak buying activities at the support levels of RM3.60, RM4.00 and RM4.81. We expect UMW to witness very heavy activities at its resistance levels of RM5, RM6.25 and RM6.54. Its clear downside targets are located at RM4.56, RM3.52, RM3.20 and RM1.97.

Lee Cheng Hooi is the regional chartist at Maybank Kim Eng. The views expressed in the article are the opinions of the writer and should not be construed as investment advice. Please exercise your own judgment or seek professional advice for your investment decisions. Technical reports appear every Wednesday and Friday.