Market jitters may persist

Five major exchanges down 6% on average from their rally highs

Stock Market Signals: A weekly column on the Main Board of Bursa Malaysia by G.M. Teoh 

THE KL Composite Index (KLCI) tumbled last week along with the Dow Jones and Asian markets after the French bank, PNB Paribas, froze three funds that invested in US subprime mortgage. 

Subprime mortgages are the riskiest property loans, often extended to people who have payment difficulties or bad credit history. Many traders expected this problem to drag down markets and many of them failed to predict the timing correctly. 

The pin has hit the balloon and the technical picture is now ugly. Currently, nobody really knows how far this decline would go or last. Our technical guess is that it would take a week or two to work itself out. 

We must not forget that hedge funds were the driving force behind the worldwide rallies that established historic highs. Now, more hedge funds are suffering massive losses and more bad news can expand the meltdown. 

Who else could be in trouble? The US Securities and Exchange Commission (SEC) is now combing Wall Street books for subprime losses and any bad news would be magnified in markets worldwide. 

It is amazing how market sentiment changes, and what is more amazing is that people do not want to believe the bullish trend has ended. 

Even central banks are out in force to sooth the market sentiment. Last week, the US Federal Reserve pumped in US$87bil to calm the nerve of the market and avert a market crash. The European Central Bank pumped in a record US$130bil into the banking system to help calm nervous markets after BNP Paribas blamed the deteriorating conditions in the subprime mortgage markets and stopped investors from redeeming 1.6 billion euros worth of funds. 

The Dow Jones Industrial Average ended Friday at 13,239.54 points, off 782 points or 5.57% from its July 17 historic high of 14,021.95 points. The Hang Seng Index lost 1,765 points or 7.5% from its 23,557.74-point peak of July 26 and Singapore’s Straits Time Index gave back 329.58 points or 8.9% from its mid-July rally high of 3,688.58 points. 

Japan’s Nikkei Index erased 1,531 points or 8.36% from its early July high of 18,295.27 points. The Shanghai Composite Index almost bucked the bearish trend and retraced only 20.61 points or 0.21% from its historic peak of 4,769.61 points. 

So far, the Kuala Lumpur Composite Index (KLCI) has fallen 104.48 points or 7.50% from its historic high of 1,392.18 points. 

These five major exchanges only declined on the average 6.02% from their rally highs. This is a normal development in a minor correction following a major bull run. The concern for a market crash would only deepen when these markets begin to show a 10% to 15% drop from their rally peaks. 

Last week. the KLCI plunged from a week's high of 1,324.68 to 1,275.13 points and edged off decline lows to finish the week sharply lower at 1,287.70, down 47.72 points or 3.57% from previously. 

All the key index-linked stocks finished the week with major losses. 

Tenaga Nasional, Maybank, Bumiputra Commerce, Telekom, Public Bank, Genting, Sime Darby, Petronas Gas, Plus Expressways, Digi.Com and Golden Hope Plantation fell sharply in the negative territory and contributed to a combined 21.21 points or 44.44% loss in the index. 

MISC and Kuala Lumpur Kepong closed unchanged. 

Volume for the week remained high at 1.089 billion shares compared with 1.273 billion shares the previous week. The daily average volume for the week was lower at 217.82 million against 254.60 million shares previously. 

This week, bearish jitters would continue to dominate the market. In order to protect our financial interests and ensure success in these extreme volatility and exceptional times, traders would need to impose strict trading rule. 

There will be volatile price swings and excessive moves in either direction would provide traders with the opportunities for short-term trading. 

At present, the daily charts are showing an important 25% retracement chart support at 1,260–1,250 points. A downward breakout from these levels would take the index to test its 33% retracement chart support at 1,230–1,220. 

Chart resistance for this week stands at 1,300–1,325 points and a minor chart hurdle is seen at 1,330–1,345. 

The daily candlestick chart ended the week positive. A hammer candle with a long lower shadow and closing near the day’s high was formed at Friday’s close. The appearance of such a candle after a significant decline or when prices are oversold usually indicates the formation of a support level and is thus considered to be a bullish signal. 

All the daily technical indicators, except the stochastic, ended the week bearish and showed the downward trend would resume. 

The daily stochastic triggered the short-term buy signal on Aug 8 and stayed mildly positive at Friday’s close. The oscillators per cent K and D settled the week slightly lower at 32.52% and 22.15% respectively. 

Daily Money Flow Index (MFI) fell from a week's high of 55.92 points and ended lower at 27.30 points. Analysis of the MFI shows strong bearish flows took place last week. 

The main trend-tracker, the 3- and 7-week exponentially smoothed moving-average price lines (ESA-lines), triggered the sell signal on Aug 27 and ended the week in bearish divergence. Currently, the weekly ESA-lines are showing the main trend is bearish. 

The short-term trend-tracker, the 3- and 7-day ESA-lines, settled in bearish divergence and signalled the immediate-term trend of the index remained bearish. 

The 5-day RSI fell from a week's high of 40.37 points on Aug 9 and closed Friday marginally lower in the oversold territory at 27.30 points. Analysis of the RSI shows the index’s immediate underlying strength is negative.

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