This article first appeared in The Edge Financial Daily, on July 29, 2016.
US equity markets treaded water in uncharted territory ahead of the Federal Open Market Committee meetings on Tuesday and Wednesday. A stable interest rate policy decision from the US Federal Reserve caused the markets to gyrate narrowly. Apple Inc’s results lifted technology stocks, but a plunge in crude oil sent energy producers lower. The Dow Jones Industrial Average inched down 1.58 points to 18,472.17, while the S&P 500 Index fell 2.60 points to end at 2,166.58 on Wednesday.
The FBM KLCI traded in a narrow range of 15.42 points for the week, with higher volumes of 1.4 billion to 2.22 billion shares traded. The index fell 5.06 points and closed at 1,658.50 yesterday, from the previous day, as blue-chip stocks like AMMB Holdings Bhd, British American Tobacco (M) Bhd (BAT), Genting Bhd, Genting Malaysia Bhd and Petronas Dagangan Bhd caused the index to decline on heavy liquidation activities. The ringgit remained fairly stable against the US dollar at 4.0550, despite Brent crude declining to US$42.20 (RM170.91) per barrel.
The FBM KLCI rose on a rally from the 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), 1,727.41 (high), 1,600.92 (low), 1,729.13 (high), 1,611.88 (low) and 1,674.58 (high).
The index’s price bars are now between the 20-day and 50-day daily simple moving averages (SMAs), and this depicts a minor sideward phase for the FBM KLCI in the short term. Medium- to longer-term prospects look poorer as prices are trading below the weekly 50-day and 200-day SMAs for now.
The index’s daily indicators have turned mainly negative, with its Directional Movement Index (DMI), moving average convergence divergence (MACD) and stochastic issuing obvious sell signals. However, its Commodity Channel Index (CCI) and oscillator have remained positive. As such, the index’s weaker support levels are seen at 1,600, 1,611 and 1,651, while very heavy liquidation at resistance areas of 1,658, 1,684 and 1,729 will cap the index’s rise.
Due to the uncertain tone of the FBM KLCI, we are recommending a chart “sell” on BAT. BAT manufactures, imports and sells cigarettes, pipe tobaccos, cigars and luxury consumer products. A check on Bloomberg reveals that 19 research houses cover the stock, with two “buy”, five “hold” and 12 “sell” calls.
Maybank Investment Bank’s (Maybank IB) tobacco analyst recently downgraded BAT’s target price (TP) and earnings forecasts as its second quarter of financial year 2016 (2QFY16) core net profit of RM134 million took its first half of FY16 core net profit to RM309 million, which was below expectations. The shortfall was mainly due to lower-than-expected sales and higher tax rates. As such, Maybank IB cut BAT’s discounted-cash-flow 12-month TP from RM50 to RM48.50.
BAT’s chart trend in the daily, weekly and monthly time frames is firmly down. From a weekly Wave 3 low of RM40.24 (May 2016), its share price rebounded on a Wave 4 retracement to a recent high of RM56.18 (July 2016). After the RM56.18 high, its share price collapsed this week on its Wave 5 downside move.
As its share price broke above its recent key critical support levels of RM49.62 and RM54.70, look to sell BAT on any rallies to its resistance areas as the moving averages depict a very firm short- to long-term downtrend for this stock. The daily and monthly indicators (like the CCI, DMI and MACD) have issued very obvious sell signals, and now show firm and obvious indications of BAT’s eventual plunge towards much lower levels.
It would attract very firm selling activities at the resistance levels of RM48.20, RM49.62 and RM54.70. We expect BAT to witness weak nibbling activities at the support levels of RM40.24, RM44.69 and RM47.40. Its clear downside targets are located at RM39.90, RM35.30 and RM30.
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 judgement or seek professional advice for your investment decisions. Technical reports appear every Wednesday and Friday.