KLCI: Wave 3 In The Making

Fear begets fear. That’s the core of Soro’s Theory of Reflexivity, of which he smartly used to take advantage of the general public’s herd mentality to amass great personal fortune over the decades of his active participation in various financial markets. And yes, reflexivity is happening now in most Asian equity market – at a great magnitude in fact. The past few weeks were disastrous to many as they witnessed their investment gains for the year got wiped off in a relative short period of time. Technical rebounds in global equity markets were short-lived as the weak sentiment induced traders to short on any market pullback. Wrongful application of our innate ability to extrapolate past events to the future causes the investment communities to increasingly believe that we are now experiencing a recessionary dip, and whatever that we had experienced are merely the beginning. This belief is further reinforced by China’s weak PMI data and Bernanke’s “hint” on stopping the quantitative easing, indicating a possible recession or sluggish growth in months or years to come. Recession talks are mushrooming in the local investment communities as well since crucial support levels were breached, no thanks to the appreciation of USD against RM which causes a flight of capital out of our capital market.

Let me make it clear here. Yes we are in a bearish market right now but no we are NOT experiencing a recessionary dip. It is more accurate to consider the global selldown in equity market as a medium-term downtrend until there are more concrete evidences to show otherwise. While the direction and magnitude of the price movements of a recession and a medium-term downtrend are similiar, the duration of the trend and the number of opportunities to profit differ greatly for both situation.  In a recession, the number of opportunities are so scarce that it is best to keep shorting the market and refrain from taking long position in any stocks until the market shows a clear sign of reversal. On the contrary, opportunities to profit by taking long position in stocks do exist almost every month in a medium-term downtrend although the sentiment is equally bad.

Let’s take a look at the chart. Most are expecting the market to rebound this week after a 18-points-recovery following a morning crash which brought the index down by 24 points on Friday. But instead of moving higher, the market fell gradually today and closed below the crucial support of 1743. This essentially means that the market will move even lower in the near term, possibly to 1718 (fill the gap) or 1700 (the psychological support) before a technical rebound occurs. We are currently in Wave 3 of Elliot DownWave, so do expect a fall of greater magnitude compared to the previous fall earlier this month.

The poor performance of our index today was contributed partly by the great fall of BAT [4162], which caught many by surprise. The big  dip of the index constituent warrants our attention as it could have “dropped too much in too short period of time”. This means that a tehcnical rebound is ought to follow and we can profit from it. Besides stopping at the support level of RM56.60, no obvious indication of possible reversal can be seen today. The daily transacted volume was not satisfying as a move of such magnitude should be accompanied by greater volume for a reversal to be possible. However, we can see from the trade details that bulk of the volume is concentrated at a few bids above RM57, indicating that a “base” is built around that area. Share price could move up tomorrow from this area or could continue to fall lower before rebounding somewhere around the horizontal support of RM55, which is also close to the medium-term uptrend line (the intersection of the 2 lines give the price level a stronger possibility of rebounding). Do plan your trade accordingly.


You may also want to put GAB [3255] in your watchlist as well. Expect it to rebound greatly tomorrow or the day after.

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