That terrible sinking feeling

World equity malaise increased further as US stocks fell and sent the S&P 500 Index down for a sixth straight day, as the cost of insuring European government debt against default rose to a record level on concerns that the region’s crisis is worsening. Equities also fell after reports indicated more signs of a slowing American economy. Consumer spending in the US rose less than forecast in October, while orders for durable goods sank. More Americans also filed for unemployment benefits last week. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for November rose to 64.1, less than economists estimated.

Locally, the FBM KLCI traded in a lower range of 27.79 points with high volumes churned. The market fell initially on foreign selling activities but rebounded as local funds bought up oversold stocks like CIMB. The index closed at 1,447.99 yesterday, up 14.82 points from the day before as blue chip stocks like Axiata, CIMB, Genting, HLFG and TM rose on local buying activities (despite the global malaise from the US and Eurozone).

The recent downward market action for the FBM KLCI since October has now caused the daily price bars to plunge below the 18 simple moving average line (SMA). The three weaker support levels are seen at 1,380, 1,400 and 1,440, while the very firm resistance levels are seen at 1,448, 1,452 and 1,494. Due to the potentially volatile global markets, we believe that investors should be cautious and take quick profits on rebounds. The current rebound is confirmed as a “bear market relief rally”, rather than a change of trend. From the all-time high of 1,597.08 (July) to the 1,310.53 swing low, the index surpassed this 62% retracement level briefly on Oct 31 to 1,493.28 and traded lower yet again in the last fortnight.

We feel that increased selling on large market-capped stocks on rebounds will eventually lead the index further south. We expect the global volatility to cause the index to eventually fall below the initial 38.2% retracement support level (measured from the 1,310.53 low to 1,493.28 high) of 1,423.47. Failure to hold this level would open out possibilities of moving to the 50% and 61.8% retracement levels (of 1,401.91 and 1,380.34) respectively. Late buying and support on very selective index components will be superfluous in the longer-run in the face of global adversity.

A stock that captured our attention with its recent downward price movement this week was TNB. Downside risk for the stock is emerging after it fell below the 19 and 50-day simple moving average (SMA) lines. This suggests that the recent rebound from its low of RM4.89 in September to a recent high of RM6.00 is revealing bearishness in its share price movements. Looking at the bands, we also notice that the recent price movement has dipped below its mean and is hugging the lower Bollinger band. The expanding band indicates rising volatility for TNB’s share price and suggests that there are more sellers than buyers at this point.

A check on Bloomberg reveals that TNB has its fair share of coverage by the investment community with a total of 20 research houses covering the stock. The fundamental analysts’ sentiment is currently tilting towards more number of bullish than bearish calls. However, looking at the supply and demand of the stock, its price movement in the short term has moved into a downtrend.

early November, US rating agency Standard & Poor’s (S&P) revised its outlook on TNB to “negative” from “stable”. They lowered its outlook because its profitability will weaken and higher operating costs will continue to affect the company. This assumption is based on the premise that higher fuel prices (as a result of a shortage in gas supply) will continue to burden TNB’s cash flow.

TNB’s share price had made a key weekly major Wave-4 high at RM6.00 (Oct 27). Since that high, it fell to a low of RM5.34 in Nov 24 (a loss of 11% over the last month). Look to sell TNB on any rallies to its resistance areas as the moving averages depict daily, weekly and monthly downtrends for this stock. The daily, weekly and monthly indicators (like the CCI, DMI and Oscillator) are very negative and now depict the firm indications of TNB’s prolonged price weakness.

We expect TNB to remain very weak on any rebounds to its resistance levels of RM5.40, RM6.00 and RM7.43. It will attract heavy selling at those areas from all the stale bulls, while its support areas of RM4.48, RM4.89 and RM5.17 will remain very weak. Downside targets for TNB are RM4.05 and RM4.78.

Lee Cheng Hooi is head of retail research at Maybank Investment Bank. 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.