Stock Markets Below 20 RSI (OSK)

Once-in-a-Blue-Moon RSI

Triggered by the S&P’s downgrade on US’ long-term sovereign credit rating, the knee-jerk reaction has resulted in the daily RSI of the US key indices and some benchmark indices in Asia such as HSI, KOSPI and FBM KLCI, falling below the standard 20-pt oversold levels. The HSI is indeed trading at a greater oversold situation now versus the World Financial Crisis in 2008. Similar to the SPX prior to the overnight 5% rebound, its daily RSI had also been pressed down to the 16.5-pt level, which is a level not even seen during the crisis 3 years ago. On the local front, the daily RSI of the FBM KLCI has also retraced to the lowest level since the March 2009 (the beginning of the 2009-2011 bull market), matching the same level recorded in October 2009 and 2010. Purely using this classic overbought / oversold indicator as our guidance, it would seem like these indices may have been oversold, at least temporarily. Nevertheless, other than the oversold phenomena, we see no other signs of reversal just yet and their near-term trends remain obviously down. Having said that, the current oversold level could be a good entry point for quick momentum trades as other reversal signals may not emerge until the indices climb higher from the yesterday’s intra-day low.

The FBM KLCI failed to hold up the critical 1,474 pt-level yesterday and closed marginally below it, at 1,472.12 pts. As mentioned earlier, the index’s daily RSI has been pressed down to the level matching the oversold condition seen in October 2009 and 2010. This means that the market is indeed at the most oversold level now since the bull market started in March 2009. In fact, its daily RSI retraced to as low as 14-pts during the day when the FBM KLCI was down by more than 70-pts.

As the index has been sold down to the most oversold level for the 2009-2011 bull market and is now struggling at the critical 1,474 pt-level, we can now have a game plan. Should a decisive close back above the 1,474 pt-level occur, coupled with the current oversold condition, it would send out a strong signal that the FBM KLCI is likely to start stabilizing.

Meanwhile, other than the 17-pt closing of the daily RSI yesterday, we see no other bullish reversal signals for the index and the near-term trend is still obviously down. Despite that, we think it is a good bet at above the 1,474 pt-level, at least for a temporary technical rebound, when the daily RSI retraced to the lowest level for the 2009-2011 bull market.

Immediate strong support is seen at the 1,445 pt-level, followed by the yesterday’s intra-day low of 1,423 pts.