Fall of KL shares likely to be cushioned this week

Buy on weakness blue chips like Maybank, Sime Darby,
Genting Malaysia, Petronas Chemicals to ride on a New Year rally, says a
head of research

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The S&P warning that credit ratings of most eurozone countries may
be downgraded ahead of a summit on the European debt crisis,
weaker-than-expected economic data from Japan and Australia and
Germany's rejection of proposals to add power to the eurozone's bailout
fund all combined to dampen the local stock market last week.

Week-on-week,
the blue-chip benchmark FTSE Bursa Malaysia Kuala Lumpur Composite
Index (FBM KLCI) lost 28.89 points, or 1.94 per cent to end at
1,460.13, with CIMB (-31 sen), Sime Darby (-22 sen), Maybank (-15 sen),
IOI Corp (-14 sen) and Genting Bhd (-24 sen) contributing more than half
of the index's slump.

Average daily traded volume and value
rose to 1.92 billion shares and RM1.33bn respectively, compared with the
1.55 billion shares and RM1.68 billion average the previous week, due
to keen trading interest on cheaper-priced ACE Market and penny stocks.

While
technical indicators flash further correction this week after last
week's pullback, the New York Dow's 1.6 per cent advancement last
Friday, the positive development in Europe and Malaysia's better than
expected exports could neutralise the downside pressure.





The uptick in the US equity market was driven by the Thomson
Reuters/University of Michigan preliminary index of consumer sentiment
that climbed 3.6 points month-on-month to 67.7 and the European Union's
near-unanimous agreement (as UK refused to endorse it without any veto
right over future financial regulations) to handle the euro crisis more
decisively.

The Eropean Union members agreed to boost the rescue
fund by 200 billion (RM840 billion), establish a permanent 500 billon
(2.1 trillion) rescue fund by July next year, move away from negotiating
hair-cuts with bond holders and imposing an auto-correction mechanism
if the deficit strays beyond 0.5 per cent apart from penalties and
intrusive controls over countries that exceed the 3 per cent deficit
target.

While these measures are in the right direction,
details are sketchy on the penalties involved and legality issues in
enforcing them.

Nonetheless, the broader concerns over the implication of deficit cuts on the economy remain.

With recent stress tests in Europe stressing the urgency of raising
fresh funds to meet core capital ratio requirements next year, lending
activities could be affected triggering a liquidity crunch that would
affect private sector and economic expansion.

Let's hope that
S&P does not worsen the outlook by downgrading any of the eurozone
countries post last week's meeting of European leaders. A cut in Italy
and Spain's rating will raise doubts on German's standing and amplify
the credit crunch.

China is already feeling the heat with Europe being its largest export destination.

The
country's exports growth in November narrowed to the weakest pace since
2009, raising expectations for further policy easing to spur growth.

Other regional players are expected to face the same trend and make similar policy responses.

Thus, Malaysia's exports for October that advanced by a robust 15.8 per
cent year-on-year (YoY) than consensus growth forecast of 7.3 per cent
YoY, may not be a true reflection of what lies ahead.

The
electrical & electronics segment is already seeing the impact of a
broad slump in the eurozone with exports deteriorating by 9.0 per cent
YoY in October.

Thus, should continue to take profit on
technology stocks while accumulating undervalued glove players that are
expected to benefit from improved demand, lower latex prices and weaker
ringgit.

Buy on weakness blue chips like Maybank, Sime Darby,
Genting Malaysia, Petronas Chemicals to ride on a New Year rally.
Maintain a trading mentality in current uncertain times.

On the
US front, no surprises are expected from the Federal Reserve when it
meets this Wednesday. Present rates are expected to be maintained.

Technical outlook

Spot
month December FBM KLCI futures tumbled 44.5 points week-on-week to
1,458.5, reversing to a 1.63-point discount to the cash index, compared
with the 14-point premium the previous Friday, depressed by the adverse
external sentiment on eurozone concerns.

The local stock market
stayed buoyant on Monday with profit-taking well-absorbed on improving
external sentiment and resurgent buying momentum, as speculation of a
change in shareholdings in Proton kick-started rotational plays on lower
liners.

The index was rangebound between low of 1,487.36 and
high of 1,492.71 before closing up 0.93 points at 1,489.95 on robust
volume totaling 2.3 billion shares worth RM1.33 billion.

Stocks
fell for profit-taking correction the next day, following the S&P
warning that credit ratings of most of the eurozone countries may be
downgraded due to the worsening European debt crisis.

The key FBM KLCI dipped 9.03 points to close at 1,480.92, after oscillating between a high of 1,484.81 and low of 1,478.12.

While
blue chips stayed mostly in profit-taking consolidation mode on
Wednesday, the listing of Pavilion REIT and rotational interest on penny
stocks dominated trading interest.

The benchmark index ended up 2.07 points at the day's high of 1,482.99 due to a late spurt, off a low of 1,473.68.

Stocks
fell in line with weaker regional markets the following day amid
concern ahead of a summit on the European debt crisis and
weaker-than-expected economic data from Japan and Australia.

It slipped 10.07 points to settle at 1,472.92, off an opening high of 1,477.75 and low of 1,469.93.

Overnight
losses on Wall Street, after the European Central Bank dashed hopes for
more measures to contain the debt crisis and Germany rejected proposals
to add power to the eurozone's bailout fund, sparked renewed weakness
ahead of the weekend.

The index subsequently lost 12.79 points
to close at 1,460.13, off a low of 1,456.71, as losers beat gainers 515
to 213 on slower trade totaling 1.29 billion shares worth RM1.05
billion.

The trading range for the benchmark index shrank to 36
points last week, compared with the 65.32-point range the previous week,
as blue chips staged profit-taking correction. For the week, the
FBM-EMAS Index slid 170.06 points to 9,999.55, while the FBM-Small Cap
Index shed 120.1 points to 11,450.15.

The daily slow stochastics
indicator on the index has hooked down to trigger a sell signal, while
the weekly indicator has turned lower from the overbought line. The
14-day Relative Strength Index (RSI) indicator has also turned lower for
a reading of 48.55 as of last Friday, while the 14-week RSI hooked down
for a weaker reading below 50.

The daily Moving Average
Convergence Divergence (MACD) line has weakened and is fast approaching
the signal line, as is poised to trigger a sell on further weakness,
while the weekly MACD is losing upward momentum.

Meanwhile,
the +DI and -DI lines on the 14-day Directional Movement Index (DMI)
trend indicator has crossed for a sell signal on a leveling ADX line,
suggesting further fall ahead.

Conclusion

Fresh
sell signals on both the daily slow stochastics and DMI indicators
following last week's fall implied that the FBM KLCI should see further
downward correction this week to neutralise the bearish technical
indicators.

Moreover, weaker momentum readings on the RSI and
pending daily MACD sell signal would discourage bargain hunting until
the index stabilises.

Last Friday, the index broke below
immediate support from the 100-day moving average, which is falling to
1,467, fell to low of 1,456.71, and is likely to see further weakness
towards next support at 1,447, the rising 50-day moving average.

Better chart supports are at 1,424, the November 23 low, and 1,420,
representing the 38.2 per cent Fibonacci Retracement (FR) of the
sell-off from the 1,597 record high of July11 to the low of 1,310 on
September 26.

This should be a reasonably good support cushion in case external market environment deteriorates.

On the upside, immediate resistance is revised lower to 1,488, the 61
per cent FR, with stronger hurdle at 1,502, the overhead 200-day moving
average, and next hurdle at 1,529, the 76.4 per cent Fibonacci
Retracement (FR) of the 1,597 to 1,310 sell-off.

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