Growing overbought condition

  • Business
  • Saturday, 25 Apr 2009

Investors may take profits while the CI scales nearer to the pivotal resistance level.

REVIEW: Overnight Dow Jones Industrial Average rose 5.90 points to 8,131.33 amid gains in the banking issues the previous Friday, extending the market’s rally to six weeks, as news of improving consumer spending bolstered hopes of the US economy stabilising. A higher US crude oil futures, firming 35 cents to US$50.33 a barrel also aided the energy shares.

Against the positive backdrop, many people had expected a good run in Asian bourses on Monday, but surprisingly, they were generally range-bound with a mild upward bias on bargain-hunting interest offsetting a bout of profit-taking activity. Perhaps, because of the indecisive movements in the regional markets, investors on the home front took the excuse to book profit, which witnessed Bursa Malaysia key barometer Composite Index (CI) turning negative soon after the opening bell.

Fortunately, some support in the core index-linked counters managed to keep the CI within a narrow band and later helped it reversed course to close at the plus side, up 3.20 points to 968.37.

Despite the steadier ending, the broader market was in consolidation process, with the scoreboard showing losers thumping winners by 327 to 233. Then, overnight Wall Street took a dive, plunging a huge 289.60 points, or 3.56% to 7,841.73 in the wake of fresh jitters about the health of the US economy after Bank of America reported a big jump in troubled loans. A steep pullback in crude oil prices, dropping US$4.45 to US$45.88 a barrel added to the downbeat note.

As expected, major Asian stock exchanges, such as Shanghai, Tokyo, Sydney and Hong Kong reacted accordingly, sagging between 0.85% and 3% on renewed liquidation pressure, but in an unprecedented move, trading on the local bourse was somewhat calm on follow-through bargain hunting alternated with mild selling activities.

Though the CI declined some 9.38 points in early trade, Bursa Malaysia clawed back in the afternoon on local funds support to settle marginally lower, easing a minor 1.77-point to 966.60 on Tuesday. After a short respite, the local bourse turned sideways but with an upward favouritism the following day, as a quick rebound in overseas equities gave encouragement to the local institutional players to continue seeking value buys.

Apparently, a positive remark by Treasury Secretary Timothy Geithner that most US banks have enough capital to keep lending sparked a strong recovery in global banking stocks.

On the back of an positive ambience, the CI raced to an intra-day high of 976.29 before trimming advances to close 1.98 points firmer at 968.58. Thereafter, the major index tacked on an extra 10.06 points to 978.64 and an additional 14.04 points to 992.68 yesterday, spurred by a strong performance in regional peers and optimism companies may report better-than-expected earnings in the second half respectively.

Statistics: Trading range stood at 35.11 points, with the CI posting a high of 992.68 yesterday and touching a low of 957.57 on Monday. Week-on-week, the key index climbed 27.51 points, or 2.9% to 992.68, against 965.17 the previous Friday.

Total volume shrank to 6.424 billion shares valued at RM5.822bil compared with 7.176 billion shares worth RM6.064bil done a week ago.

Technical indicators: The daily slow-stochastic momentum index continued to flirt at the top on bullish extended-move despite triggering a short-term sell on April 16. Likewise, the 14-day relative strength index (RSI) maintained a strong posture at the bullish territory. Also, the daily moving average convergence/divergence (MACD) histogram extended the steady upward momentum, in tandem with the daily trigger line to stay positive.

Elsewhere, weekly indicators retained the bullish note, with the weekly slow-stochastic momentum index surging higher into the overbought area and the weekly MACD continuing to expand upward against the weekly signal line.

Outlook: After a short pause earlier of the week, Bursa Malaysia resumed the upward thrust on fresh buying interest, propelling the CI to a high of 992.68 yesterday, also the best since Oct 7, 2008. All in all, the key index had advanced a total of 156.17 points, or 18.7% from the recent bottom of 836.51 on March 12, carving out a near vertical style of recovery, thus catching many people by surprise. While most investors participated aggressively on optimism of an economic healing ahead, others have grown rather cynical, attributing the speed of the market’s run-up to an inflow of “short-term monies”, adding that greed has overwhelmed fear and raised doubts about the sustainability. Obviously, we do not have any proof of “hot money” snapping up stocks for immediate gains, but what is very clear is, so long the key index stays above the 14-day simple moving average (SMA) and the 21-day SMA, resting at 952 and 932 respectively and still rising, the upward momentum is intact.

Technically, the market is bullish but given the growing overbought condition of the daily and weekly slow-stochastic momentum indices, and the 14-day RSI, there is a high possibility investors may opt to take profits while the bulls trot nearer to the pivotal 1,000 points psychological level. The next upper hurdle is seen at 1021.20, followed by the 1,040-1,042 points band.

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