Downward correction forecast

LAST close (Jan 24): 668.81 points, down 1.72 points from a week ago. Week’s high: 676.97 points; Week’s low: 633.88 points. 

The KLSE Composite Index (CI) failed to expand on its bullish momentum and entered into a moderate technical correction last week. Traders offloaded key index-linked stocks as positive sentiment linked to the Valuecap fund fizzled. War fears also influenced the profit-taking activities. Generally, people are keener to realise their profits rather than sit on their positions ahead of today’s United Nations inspectors' report on Iraq and the Camp David meeting between US President George Bush and British Prime Minister Tony Blair on Friday.  

Most of the key index-linked stocks returned all of its intra-week’s gains and closed the week with minor changes. Index heavyweight Tenaga Nasional, Telekom, MISC and Sime Darby all closed with small gains ranging from 5 sen to 15 sen and supported the index by a combined 2.07 points. Maybank, Maxis Communications, Petronas Gas, Plus Expressways, Public Bank and Genting all ended unchanged to slightly lower and eroded the CI by a combined 1.32 points. 

Total weekly volume of the 100-stock CI fell to 337.54 million shares from 417.27 million shares a week ago. Average daily volume for the week declined to 67.50 million shares from 83.45 million shares previously.  

Chart-wise, the CI closed the week negative and indicated that the immediate term market is still top-heavy. Last week's failed rally attempt had resulted in a strong wave of technical selling, and if the index failed to regain its positive momentum this week, we would likely see the bearish momentum expanded.  

Local funds are expected to sit on their hands ahead of the UN report today and Camp David meeting on Jan 31 and the extended holidays for the Chinese Lunar New Year would deter speculative players from entering the market. We have a situation here where everyone is waiting for the market to rally to off-load stocks. This is a technically bearish scenario. 

Based on the daily chart, the index has an immediate support at the 665-level. Violation of this support could pressure the index lower and seek for a fresh base at the 655.00-650.00 level. A chart-gap was established at the 655.00-652.00 level during the run-up and there is strong technical evidence to suggest that these levels could be re-visited soon. Minor chart-support for this week is seen at the 635.00-645.00 levels.  

Chart-resistance for this week stands at the 673.00-678.00 level. The index is considered to be technically positive if these levels can be penetrated successfully.  

The daily and weekly technical indicators ended the week neutral-to-slightly bearish and signalled that the index’s underlying strength is weal. 

The daily Money Flow Index (MFI) declined from an intra-week high of 75.79 points and closed the week lower in the positive zones at 68.62 points. The weekly MFI confirmed that distribution started on Jan 21 and indicated that the process would continue into this week’s trading. The weekly MFI finished the week slightly higher in the positive zones at 60.44 points. Analysis of the weekly MFI shows that the CI is technically toppish.  

Exponentially smoothed moving-average price line on daily high and low: The daily MAV-lines remain in uptrend during Friday’s close. Closing prices near the MAV-high line shows that the index is attempting a trend change. Based on the MAV-lines, the CI has an important trend-reversal support at the 662.00-654.00 level this week. Breaking of this vital chart-support would indicate that a bearish cycle has begun. 

Stochastics: The daily stochastics turned negative on Jan 20 and stayed bearish during Friday’s close. The daily oscillator per cent K and D settled the week sharply lower at 47.05% and 66.21% respectively. Analysis of the daily oscillator indicates that the index has entered into a bearish phase and is likely to remain in this position for a while. The weekly stochastics ended the week with its bullish signal intact and signalled that the index’s near-term trend is still positive. The weekly oscillator per cent K and D closed the week slightly higher at 87.62% and 74.32% respectively.  

The 3-day and 7-day exponentially smoothed moving-average lines ended the week with a strong negative convergence and signalled that a cycle change is about to begin. The 3-day and 7-day ESA-lines settled the week with the 3-day and 7-day lines at 670.00 and 667.00 points respectively. A successful negative crossover this week would indicate that immediate term trend is bearish. 

Relative strength index (RSI): The daily RSI (not shown in the chart) dropped from a week's high of 71.30 points on Jan 21 and settled the week lower in the positive zones at 63.82 points. Analysis of the daily RSI shows that the immediate underlying strength of the index is slightly negative. The weekly RSI closed with fractional losses at 50.96 points. Analysis of the weekly RSI shows that the index is in a neutral position and could continue to ease in the near term.  

Daily moving-average convergence/divergence (MACD): The daily MACD (not shown in the chart) held on to its buy-signal during Friday’s close. The MACD and trigger-line settled the week higher in the positive zones at 8.72 points and 7.84 points respectively. Analysis of the daily MACD indicates that the index is in a bullish cycle despite the downward correction last week. The weekly MACD (not shown in the chart) remains positive for the near-term market. The weekly MACD closed the above the trigger-line and settled higher in the negative zones at minus 13.44 and minus 17.36 points respectively. 

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