A volatile start to February

by **Cals** Sat 06 Feb 2016, 02:16

A volatile start to February

By Lee Cheng Hooi / The Edge Financial Daily | February 5, 2016 : 9:50 AM MY

This article first appeared in The Edge Financial Daily, on February 5, 2016.

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US equity markets ended mixed on Wednesday as a late afternoon rally on energy and financial stocks led the major American indices up. The late rally reversed initial sharp losses after weaker service sector data was released. The S&P 500 Index rose 9.5 points to 1,912.53, while the Dow Jones Industrial Average surged 183.12 points to end at 6,336.66.

The FBM KLCI moved in a wider range of 35.4 points for the week, with higher volumes of 1.49 billion to 2.05 billion shares traded. The index closed at 1,656.77 yesterday, up 23.47 points from the previous day, as blue-chip stocks like Genting Bhd, Kuala Lumpur Kepong Bhd, Petronas Gas Bhd, Petronas Dagangan Bhd and Sime Darby Bhd caused the index to rise on obvious buying activities. The ringgit firmed against the US dollar at 4.1450, as Brent crude gained further traction on buying to US$34.75 (RM144.21) per barrel.

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

The index’s decline from 1,867.53 (April 2015) to 1,503.68 (August 2015) was in a perfect 1.62 ratio of the initial down-thrust from the high of 1,896.23 (July 2014) to the 1,671.82 low (December 2014). The subsequent rebound from the 1,503.68 low stalled at the 1,727.41 high, which was also a perfect upward 62% retracement of the 1,867.53 to 1,503.68 move.

The index’s next two minor swings comprised a minor low of 1,622.84, which then rebounded and stalled at a 1,706.25 minor high on Dec 30, 2015. Its persistent weaker price action last month was in tandem with the softer tone of global markets, and the index broke the 1,622.84 support to a recent low of 1,600.92 on Jan 21, 2016.

The index’s daily signals are mixed, with its commodity channel index (CCI), directional movement index (DMI) and moving average convergence divergence (MACD) indicators showing positive signals, while the oscillator and stochastic are negative. As such, the index’s support levels are seen at 1,600, 1,631 and 1,656, while heavy profit-taking in the resistance areas of 1,660, 1,667 and 1,727 will cap any index rebound.

The FBM KLCI’s 18-day and 40-day simple moving averages (SMAs) depict an emerging uptrend for its short-term daily chart. The index’s price bars are between the 50-day and 200-day daily SMAs, and this depicts a neutral phase for the FBM KLCI in the medium to longer term.

Due to the volatile tone of the FBM KLCI, we are recommending a chart “sell” on Evergreen Fibreboard Bhd. A check on the Bloomberg consensus reveals that three research houses cover this stock, with two “buy” calls and a “hold” call.

Evergreen is in the wood building material business. The company manufactures medium-density fibreboards, knocked-down wooden furniture and doors. Its current price-earnings ratio is at a decent and low 11.1 times, while its price-booking ratio is at a marginally elevated level of 1.04 times. Its return on equity stood at 10.1%. While its revenue has dropped, its earnings per share increased marginally from 3.1 sen to 3.6 sen from the second quarter of 2015 (2Q15) to 3Q15. There was no significant news on the stock recently.

Evergreen’s chart trend in the daily time frame is very firmly down. Its share price has made an obvious plunge since its major daily Wave-5 high of RM1.71 on Jan 11, 2016. Since that RM1.71 high, Evergreen fell to its recent low of RM1.24 this month.

As its share price broke above its recent key critical support levels of RM1.44 and RM1.55, look to sell Evergreen on any rallies to its resistance areas as the moving averages depict a very firm short- to medium-term downtrend for this stock. The daily indicators (like the CCI, DMI, oscillator and MACD) have issued clear “sell” signals, and now show firm and obvious indications of Evergreen’s eventual decline towards lower levels.

It would attract firm selling activities at the resistance levels of RM1.25, RM1.44 and RM1.55. We expect Evergreen to witness weak buying activities at its support levels of RM1.05, RM1.20 and RM1.24. Its downside targets are located at RM1, 91 sen and 63 sen.

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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 report appears every Wednesday and Friday.
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