(Chart 1): KLCI weekly chart.
As shown on Chart1, the KLCI rose over 200 points or 26% since March, 2009, and based on the weekly chart analysis, the current resistance for the KLCI is at 1077 WinChart automatic Fibonacci Retracement line (38.2% retracement). As indicated by A, the weekly Bollinger Bands width is contracting 7%, suggesting that the KLCI is likely to consolidate.
As indicated by B, the Weekly MACD histogram of the KLCI started to turn lower, suggesting a formation of a Rounding Top, which is a signal of a consolidation. Based on a computerized simulation, the KLCI would have to break above 1085 in order to violate the Rounding Top signal. In other words, the KLCI is now in consolidation, and how would investors pick stock during this period?
Since the rally started in March, 2009, many market leaders are not starting to consolidate, namely Lionind 4235, Equine 1147, MRCB 1651, ECM 2143, KUB 6874, and many more. These counters are forming consolidation patterns such as the contraction of the Bollinger Bands, Double Tops, and Triangles.
Example 1: Lionind.
Chart 2: Lionind [4235] chart from 11/02/2009 to 04/06/2009.
As shown on chart 2, price of Lionind hit is resistance at RM 1.50, and started its technical correction, and then entered a consolidation stage forming the L1 short term dowtrend line. However, this does not mean that the uptrend of Lionind is immediately over, it is only a consolidation of an existing uptrend.
By using 14, 21, 31 EMA, together with the L1 descending line, one shall notice that price fluctuation is getting narrower, and this is an effect of a consolidation similar to the Symmetrical Triangle.
As indicated by A, if price of Lionind should break above the L1 line successfully, it would suggest an end of the consolidation and the resume of its existing uptrend. Afterwards, investors could apply the 14, 21, 31 EMA as the uptrend trailing stop reference, and the next important resistance is at RM 1.50. On the other hand, if price should break below the 14, 21, 31 EMA, it would be a signal suggesting an end of its uptrend, and therefore, investor might want to consider to take profit or to cut loss. Support below the 14, 21, 31 EMA is at RM 1.10 level.
Of course, some investor may choose to buy before a valid break out above the L1 line, this is because if price should really break out above the L1 line, those who managed to buy earlier during a consolidation might get a bigger profit for they had bought at a better price. However, there is a risk of a downside break out of a consolidation.
Chart 3: Lionind [4235] chart from 13/08/2008 to 08/07/2008.
As shown on the chart 3, price of Lionind rallied from RM 1.35 to RM 3.10, and then consolidated by forming a Symmetrical Triangle. After consolidated for about 1 month, price of Lionind broke below the dynamic support of the Symmetrical Triangle, ended its uptrend.
Example 2: MRCB
Chart 4: MRCB [1651] chart from 02/12/2009 to 05/06/2009.
As shown chart 4, MRCB formed an Ascending Triangle pattern, suggesting its uptrend has met a strong resistance at RM 1.38 level. Again, this does not mean that the uptrend is over, it is merely another form of a consolidation during an existing uptrend. If there are any positive news or new buying interest which push the price to break above L1 line, it would be a bullish breakout, and the uptrend could resume, thus a buying signal.
As indicated by A, if price of MRCB should break above the L1 resistance with substantial volume, it is a buy signal. Afterwards, the T1 uptrend line shall continue serving as the dynamic support as well as the reference level for trailing stop method. Next resistance for MRCB is at RM 1.45 WinChart Automatic Fibonacci Retracement line.
On the other hand, if price should remained resisted by L1 line, there is a risk of forming a Double Top. A typical characteristic of a Double Top is that the volume at the 2nd Top is lower than the 1st top. If price should start to retreat and break below the T1 line, it would be an end of the uptrend, which is a signal for profit taking or cut loss.
Chart 5: Hiaptek [5072] chart from 09/12/2003 to 25/05/2004.
As shown on chart 5, Hiaptek met is resistance at RM 1.18 after its uptrend, and entered a consolidation stage by forming an Ascending Triangle. However, after consolidated for about 2 months, price dropped below the dynamic support line of the Ascending Triangle, ended its consolidation and reversed its trend.
Based on the above two examples, if investors should buy before a valid break out, there is a risk of a trend reversal and therefore, it is crucial to apply a proper trailing stop method.
Current stocks with consolidation pattern:
| Code: | Name: | Pattern: |
| 1147 | Equine | Symmetrical Triangle |
| 3417 | E & O | Symmetrical Triangle |
| 6874 | KUB | Symmetrical Triangle |
| 2143 | ECM | Double Top |
Conclusion:
A healthy uptrend should have consolidation, and most likely will form patterns such as Double Top and Triangles, suggesting that the stock price is preparing for the next movement. When price break above the resistance line of a Triangle or a Double Top, it is a buy signal, provided with substantial volume. Conservative investors should not buy too early during the consolidation for there is a risk of a downside break out of the consolidation triangle. Further more, it is only logic to trade with the direction of the trend.
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