This article first appeared in The Edge Financial Daily, on February 12, 2016.
US equity markets ended mixed on Wednesday, as a late afternoon sell-off led the major American indices down. The late drop reversed initial gains after US Federal Reserve (Fed) chairman Janet Yellen’s congressional testimony hinted that the Fed could hold off on additional interest rate hikes, as the recent market tumult and slowing global growth were some cause for concern. The S&P 500 Index inched down 0.35 of a point to 1,851.86, while the Dow Jones Industrial Average tumbled 99.64 points to end at 15,914.74. However, the Nasdaq rose 14.83 points to 4,283.59.
The FBM KLCI moved in a narrower range of 32.05 points for the week, with lower volumes of 890 million to 1.23 billion shares traded. The index closed at 1,643.95 yesterday, down 0.46 of a point from the previous day, as blue-chip stocks like Axiata Group Bhd, British American Tobacco (M) Bhd, Genting Malaysia Bhd, Maxis Bhd and RHB Capital Bhd caused the index to decline on minor profit-taking activities. The ringgit weakened against the US dollar at 4.1480, as Brent crude lost ground on selling to US$30.45 (RM125.45) per barrel.
The index rose on a rally from an 801.27 low (October 2008) to its 1,896.23 all-time high (July 2014), and this represented an extended Elliott Wave “flat” rebound in a “pseudo-bull” rise completed. The next few months’ index price movements since July 2014 comprised key swings of 1,671.82 (low), 1,867.53 (high), 1,503.68 (low) and 1,727.41 (high).
The index’s decline from 1,867.53 (April 2015) to 1,503.68 (August 2015) was in a perfect 1.62 ratio of the initial down-thrust from the high of 1,896.23 (July 2014) to the 1,671.82 low (December 2014). The subsequent rebound from the 1,503.68 low stalled at the 1,727.41 high, which was also a perfect upward 62% retracement of the 1,867.53 to 1,503.68 move.
The index’s next two minor swings comprised a minor low of 1,622.84, which then stalled at a 1,706.25 minor high on Dec 30, 2015. Its persistent weaker price action in January 2016 was in tandem with the softer tone of global markets, and the index troughed at 1,600.92 on Jan 21, 2016. The index’s next rebound stalled at 1,670.93 on Wednesday, with a large and ugly daily bearish engulfing candle pattern.
The index’s daily signals are mixed, with its Commodity Channel Index (CCI), Directional Movement Index (DMI), oscillator and moving average convergence divergence (MACD) indicators showing positive signals, while the stochastic is negative. As such, the index’s support levels are seen at 1,595, 1,618 and 1,638, while heavy profit taking in resistance areas of 1,643, 1,670 and 1,727 will cap any index rebound.
The FBM KLCI’s 18-day and 40-day simple moving averages (SMAs) depict a neutral trend for its short-term daily chart. The index’s price bars are below the 50-day and 200-day daily SMAs, and this depicts a downward phase for the FBM KLCI in the medium to longer term.
Due to the volatile tone of the FBM KLCI, we are recommending a chart “sell” on Focus Lumber Bhd (FLB). Maybank Investment Bank Bhd does not cover this stock fundamentally. FLB manufactures plywood, wood veneers and laminated veneer lumber.
FLB currently trades at a very low historical price-earnings ratio of 8.1 times, while its price-booking ratio is at a marginally elevated level of 1.45 times. Its return on equity stood at 18.6%. There was no significant news on the stock recently. FLB’s share price probably fell on the ringgit’s strength against the US dollar recently.
FLB’s chart trend in the daily time frame is very firmly down. Its share price made an obvious plunge since its major weekly Wave-5 and all-time high of RM3.09 on Jan 11, 2016. Since that RM3.09 high, FLB has fallen to its recent low of RM2.01 this month.
As prices broke above their recent key critical support levels of RM2.32 and RM2.69, look to sell FLB on any rallies to its resistance areas, as the moving averages depict a very firm short- to medium-term downtrend for this stock. The daily indicators (like the CCI, DMI, oscillator, stochastic and MACD) have issued clear “sell” signals, and now show firm and obvious indications of FLB’s eventual decline towards lower levels.
It would attract firm selling activities at resistance levels of RM2.07, RM2.32 and RM2.69. We expect FLB to witness weak buying activities at its support levels of RM1.75, RM1.87 and RM2.01. Its downside targets are located at RM1.98, RM1.64 and RM1.28.
Lee Cheng Hooi is the regional chartist at Maybank Kim Eng. The views expressed in the article are the opinions of the writer and should not be construed as investment advice. Please exercise your own judgment or seek professional advice for your investment decisions. Technical report appears every Wednesday and Friday.