FBM KLCI could pull back soon after staging a relief rally in the last three weeks

Chances are that the FBM KLCI could pull back soon after staging a relief rally in the last three weeks. On the chart, the benchmark index may have run out of steam already, possibly backing off from the major resistance area of 1,445 – 1,475.

The key market barometer jumped 42.4-point or 3.0% last week to finish at 1,442.43 on Friday. Posting gains too during the week were the FBM 70 Index and the FBM ACE Index, up 4.2% and 6.3%, respectively. Rising in tandem were the daily average trading volume and trading value, up from 816.6m units worth RM1.2b to 1.1b shares valued at RM1.3b last week.

We reckon investors may want to play safe in the coming week ahead of two major meetings abroad. This follows the strong market rebounds across the region last week, paced by China shares listed in Hong Kong (+7.8%), Indonesia (+7.0%) and Thailand (+5.1%). U.S. equity indices were also up by between 4.9% and 7.6% through the week on the back of better sentiment.
Apparently, global equities are getting a lift on the hopes that policymakers in Europe would put together an action plan to sort out the sovereign debt mess soon and mend their deteriorating economic conditions. Whether the outcomes will eventually match these expectations or otherwise could be known in the next fortnight. The two key dates to watch out for are:
(a) 23 Oct, as the European countries meet to discuss on measures to resolve the region’s sovereign debt turmoil; and
(b) 3-4 Nov, when the Group of 20 nations gather to consider additional steps to stabilize the global financial system.

Meanwhile, our Malaysian bourse will be relying on local corporate developments for individual share price actions. One possible source is the upcoming Jul – Sep quarterly financial reporting season. Starting the ball rolling this week are Public Bank (possibly early part of the week), Bursa Malaysia (on Wednesday) and BAT Malaysia (Thursday).

From a technical perspective, the three-week-old relief rally by the FBM KLCI could have run its course already. The benchmark index has now clawed back 131.9-point (or 46%) from a cumulative loss of 286.6- point (as measured from a peak of 1,597.08 in first half of Jul to a trough of 1,310.53 in late Sep), recovering to where it was in mid-Sep.

We reckon the bellwether will likely back track in the near term as it faces strong resistance barriers at 1,445 and 1,475. On the downside, the index may slide lower towards the support levels of 1,415 (first) and 1,395 (second) going forward. In addition, the FBM KLCI’s weekly chart pattern (see overleaf) shows that its upward movements will probably be capped by:
(a) a short-term negative sloping trend line (in red) that began in Jul this year;
(b) the 75-week moving average line (in green, which is presently hovering at 1,470); and
(c) a long-term positive sloping trend line (in blue) stretching back to Jan 2001.