Equity Markets: Signs of bearish reversal patterns

Financial markets were volatile but lack direction last month. However, major indices closed slightly higher. Equity markets closed marginally higher on a month to month basis while prices of major commodities were mixed. The FTSE Singapore Straits Times Index (FTSTI) rose 6.2% in a month while Kuala Lumpur’s FTSE Bursa Malaysia KL Composite index (FBMKLCI) and Hong Kong Hang Seng Index (HSI) climbed 2.6% and 3.8% respectively. The US Dow Jones Industrial Average (DJIA) increased 3%. Technically in the long term, most indices are showing signs of a major bearish reversal pattern.

Price of gold ended 1.7% higher in a month at US$1,212.40 an ounce on the New York Mercantile Exchange (NYMEX) while crude oil price closed 3.4% higher. US dollar continues to weaken against major currencies after enjoying a strong rally since April because of the European debt crisis. The US dollar index on New York Board of Trade (NYBOT) fell 4.3% in a month to 84.15 as the Euro currencies gain strength.

Singapore FTSTI

The Singapore equity market was not as volatile as most of the regional markets. Trading range for the past one month was 6.5%, between 2,740.69 and 2,919.28 points and settled near the range high at 2,917.17 points, which is also a two months high. The index was bullish in the past one month but with lower volume. This indicates that investors’ confidence is still lacking.

Technically, the FTSTI is in a sideway correction with the short term 30-day moving average increasing while the longer term 60-day moving average is declining. The ADX indicator is below 20. However, the market is slightly bullish as the index is above these averages and in the ADX indicator, the PDI is above the MDI. The lack of direction since November last year formed a long term bearish reversal chart pattern called the “head and shoulders pattern”. The pattern is only confirmed once it breaks below the 2,650 points support level.

There is a short term resistance level 2,970 points and the index is expected to rally to test this level and pull back when it gets there in the immediate term. However, I would not expect a strong rally or an uptrend continuation because of weak technical indications and signs of major reversal.


Weekly FTSTI (left) and FBMKLCI (right) charts as at 9 July 2010 using NextVIEW Advisor

Kuala Lumpur FBMKLCI

The Kuala Lumpur equity market was in a less volatile mode last month with the FBMKLCI trading between 1,287.66 and 1,335.31 points or 3.7%. The benchmark index settled at 1,324.31 points and the trading volume for the past month was also relatively low. What amazed investors in this market was that the upward rally continues despite its central bank, the Bank Negara increased its Overnight Policy Rate (OPR) 25 basis points recently and it was the third time this year to buffer inflation.

Like Singapore, the trend is technically sideways with a “head and shoulders” chart pattern developing in the long term. The short term 30-day moving average is increasing while the longer term 60-day moving average is increasing. The index is just slightly above the moving averages and slightly below the strong resistance level at 1,350 points. With these uncertainties and lack of strong indication, I’d expect the index to test the 1,350 points resistance level it is unlikely going to break above it. Investors should be very cautious if the head and shoulders pattern support level at 1,240 points is broken.

Hong Kong HSI

The Hong Kong market was in a very volatile mode last month with the HSI trading between 19,383.89 and 20,957.09 points or 8.1%. Although the index climbed 3.8% to 20,378.66 points, trading volume was relative lower like other equity markets. The Hong Kong market is technically in a downtrend and the recent rally is a technical rebound off the support level at 18,900 points. The trend is up in the short term but down in the long term and the HSI is in between these averages. ADX is below 20 while momentum indicators like RSI and MACD are neutral.

The HSI may find it difficult to climb higher because the trend is bearish and at the average, selling pressure may start to develop. The China equity market has also been having strong selling pressure since April this year and this strongly affected Hong market. Therefore, I expect a sluggish market for Hong Kong.


Weekly HSI (left) and DJI (right) charts as at 9 2010 using NextVIEW Advisor

US DJIA

It was another volatile month for the US equity market last month, but not as volatile as the month before. The DJIA traded between 9,621.89 and 10,395.55 or 8.0% last month and settled at 10,198.03 points. The US equity market was still being supported despite lack of economic performance and weakening US dollar but the support was with lower volume. The DJIA also showed a bearish reversal head and shoulder pattern but the pattern is confirmed after breaking the pattern support level at 9,750 points. It rebounded at 9621.89 points.

Technically the DJIA is in a down trend as the longer term 60 and 90 day moving averages are declining and the index is below this averages. Only the short term 30-day moving average is increasing. The ADX indicator indicates that there is still strength in the down trend but other momentum indicators are neutral. Immediate resistance level is at 10,300 points. Therefore, with the weak technical indications, I expect the DJI to pullback once it climbs to the immediate resistance level and possibly test the pattern support level again.

On additional note after observing the activities in the markets above, I believe that the current short term rally is a test to see where the selling resistance is and not a genuine rally because volume is relatively weak. I expect the market to start testing support levels again this month.

Kuala Lumpur FBMKLCI: Major trend reversal formation

After a good short term rally since early June, the market corrected his week after a good rally in the previous week on lack of positive news. The FBMKLCI opened at 1,326.06 points on Monday and traded between 1,306.00 and 1,331.09 before settling at near the week’s low at 1308.76 points Thursday. The benchmark index was 17.11 points or 1.3% lower than the previous week with relatively lower volume. Last week, the average daily trading volume was 662 million shares, as compared to 766 million shares in the previous week.

No news should be good news but the recent earnings announcement from Petroliam Nasional Berhad (Petronas) dampened market sentiment. The national oil company net profit fell for the second year due to lower global crude oil prices. Petronas net profit declined 23.2% to RM40.3 billion for the financial year ended March 31, 2010. Another index component stock, gaming company Berjaya Sports Toto Berhad shares price fell after the government decided not to re-issue the sport betting license to Ascot, which is a subsidiary of Berjaya Corporation Berhad (BJCORP). Price of BJCORP fell as well.

The economic rebound in the world’s largest economy started to halt amid higher jobless claims and slower housing market. Together with sluggish economic growth in China and the Europe debt crisis, analysts are cutting back on their earlier optimistic forecasts. The US Dow Jones Industrial Average fell below the psychological 10,000 points again to a 9-month low 9732.53 points. The disappointing economic news sent oil price lower to US$72.95 a barrel from US$76.44 in the previous week. Gold price also fell from US$1,244.10 an ounce in the previous week to US$1,200.10. The US dollar weakened last week against major currencies.

The FBMKLCI was not able to stay above the mid to long term moving averages last week and is now below the averages again. The short and midterm 30 and 60-day moving averages are declining but the longer term 90-day moving average is still increasing. The index is above the Ichimoku Cloud, but the cloud is thin and this means that support is relatively week. Although the price trend is bullish, the chart pattern formation for the past few months suggests the market is at its peak. A head and shoulder pattern formation is starting to get more obvious and this is a bearish reversal pattern.

Momentum in the short term up trend has started to weaken last week after being strong in the past few weeks. The RSI declined last week and is back below the middle level and the MACD and Momentum indicators declined near the indicators’ middle levels but not below it yet. The ADX indicator has started to turn bearish few days ago before this article is written. The Stochastic Oscillator which was overbought and declining two weeks ago continues to slide last week.

The Bollinger Bands width remains firm as the FBMKLCI pulls back to the middle band, which is a 20-day moving average. The average daily trading range remains at the same level as the previous week at 9 points. Both this volatility-based indicators that indicates low volatility suggest that the market is lack direction in the near term, making it difficult for both investors and traders to identify good investment and trading opportunities.

In my previous article, I expect the index to pull back to the support level of 1,297 points before rebounding once again to test the major resistance level at 1,350 points. The index is currently slightly above this support level and therefore, a rebound is expected this week. However, I would not expect the index to test 1,350 points as it has created a new resistance level at 1,335 points.


FBMKLCI daily chart as at 1 July 2010 using NextVIEW Advisor Professional

However, the new resistance level has also formed a head and shoulders chart pattern which shows that the market is toppish and a major trend reversal is expected. This is further supported by declining RSI peaks during the formation of the chart pattern. The pattern is only confirmed once FBMKLCI breaks below its pattern neckline at 1,240 points. This is crucial level to watch and this pattern is not only visible in the Malaysian index but on other world indices as well. So, if the FBMKLCI does not rebound this week and fall further below the immediate support level, expect it to decline further to test the head and shoulders pattern neck line.

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