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Thursday, March 3, 2011

FBM KLCI: Why Neutral, Not Bearish? (OSK)

Today, we will discuss in more depth our Neutral bias view. The recent breakdown from the uptrend line which had previously supported a more than 6-month uptrend was definitely a serious breakdown. In the past, before 2010, we would have been almost certain to shift our view on the near-term market to bearish once such a critical uptrend line is violated. However, we have not been aggressive in shifting our perception towards the market this time around, mainly due to the two short down phases experienced by the market in 2010 even after the critical supports had been violated.

In January 2010, the index violated the 50-day MAV line which had supported a new bull market for about 9 months since the World Financial Crisis ended. It was a very serious breakdown which would normally drag the index much lower but to our surprise, it did not retrace much further subsequently and only stayed below the moving average line for less than 2 weeks. The index then went on to create another new high in the 2009/2010 bull market. It was the first time we had shifted our nearterm view to bearish since the market bottomed out in March 2009.

Then another bigger surprise came in May 2010. When the 1,307/1,308-pt horizontal support level was violated, it looked like a “Triple Top” had been completed. At that time, this breakdown also coincided with the DJIA potentially creating a “Head and Shoulder” bearish reversal pattern on the daily chart. However, as with the previous major breakdown, the downdraft this time was also brief, and the market did not retrace much more, as we had anticipated. It was the second time that we shifted our view to bearish since March 2009.

To the best of our knowledge, prior to 2010, the only time when the index did not develop in a major way as we had expected following the creation of a major bearish reversal signal was in February 2004. We are not sure if the current 30-stock linked index has changed the characteristics of the market momentum. Theoretically, after a more than 6-month uptrend line is violated, the immediate technical outlook should be naturally bearish. However, after the two occasions in 2010, we decided to be less aggressive in shifting our view towards this 30-stock linked index. We therefore maintain our Neutral view. Hopefully, we will get clearer signals going forward. Anyhow, we have already drawn a potential downtrend channel which should be able to provide good guidance on the near-term market direction once the channel is confirmed.

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