Last week, we mentioned 3 scenarios for the FBM KLCI, while this week, it appears that the KLCI is showing some signs of weakness, and it might be forming a downtrend. Therefore, let us further study some characteristic of a downtrend, so that readers and investors can be well-prepared for the possible outcome.
Chart 1: KLCI forming a Lower-high.
As indicated by A, after touching 1288 peak, the KLCI retreated as a technical correction. However, it was supported by the 1257 level, and rebounded. Still, the KLCI did not return to 1288 level, but instead, forming a lower-high with a peak of 1272 points, as indicated by B. This formation of a lower-high is an early sign of a downtrend formation. However, since the Bollinger Bands has not expanded substantially, and the KLCI is still supported by the 1257 level, it has not confirmed a downtrend formation yet.
If the Bollinger Bands should expand further with the KLCI below the Bollinger Middle Band, and the KLCI should break below 1257 level, it would confirm a downtrend formation, and the 14, 21, 31 EMA shall serve as the dynamic resistance for the KLCI downtrend. In contrary, if the KLCI should break above the Bollinger Middle Band, and break above 1272 level, there is a chance that the uptrend might resume.
The effects of Lower-highs:
Chart 2: The downtrend of the KLCI in 2ndhalf of 2008.
| Indication | Remarks |
| A | KLCI started to retreat after touching its high of 1166 points |
| B | KLCI breaking its support of 1100 level, making a new low. This means those who managed to buy at the recent lowest points are turning their profits into losses. |
| C | KLCI rebounded after finding a support at 1063 level, but it has failed to return to its high of A points, but forming a lower-high at 1100 level. This means those investors who bought a point A are making losses, and failed to break even. |
| D | KLCI breaking below 1063 points, making yet another new low. Those who bought at point A, B, and C, are all making losses. |
| E | KLCI rebounded at 900 point support, but only managed to reach its 1038 peak, and it started falling again. This means those who bought at points A, B, C, and D are still holding losses, can could not breakeven. |
| F | KLCI breaking below 900 level, making another new low. This means those who managed to “Buy Low” at the lowest points of 900, are also making losses. |
| G | KLCI rebounded from 930 level, but only can reach 970 peak, while those who bought at points A, B, C, D, E, and F, are all still holding losses. |
| H | KLCI breaking its lowest support again, another new low |
As illustrated in Chart 2, whenever the KLCI formed a downtrend, there are some short term investors who managed to buy at a dip, and sold at a short term peak to make quick profit. However, when these investors took profit, their stocks have to be transferred to other investors, and therefore, other investors are taking the losses. In short, at any given moment, there will be share holders making losses when the market falls.
Investors buy shares for only 1 reason, which is a hope to make profit. However, when share price started falling, and until a certain extend, the loss become too huge to bare, and therefore, these investors will have a strong memory of the price in which they paid to enter the market. That is their break-even level, thus it will be a resistance level, and the selling pressure is guaranteed. Therefore, the sharper and the longer the downtrend, the more selling pressure are being accumulated. In other words, a downtrend is a fear-dominated market where more people wanting to break even.
Of course, opportunities lied in every downtrend, but to be successful in trading, one must have a sound and careful trading plan, and only buy when the trend reverses, not when the price is cheap. And most importantly, never holding a losing stock stubbornly, and becoming an involuntary “Long term investor”.
Chart 3: KLCI 2008 downtrend.
As shown on chart 3, the downtrend of the KLCI in 2008 is clearly characterized with Lower-highs and new-lows. The KLCI lost over 730 points in this downtrend.
Some investors may be wondering, if this current downtrend should be a temporary one, and when the market finally resumes its uptrend, he or she might have missed it again. But the important matter is the consideration of Risk and Reward. Nevertheless, if investors should know how to follow the trend, there is no need to worry about missing any trend.
This week's Case Study - AMMB
Chart 4: AMMB, chart from 16/09/2009 to 9/12/2009.
As indicated by A, price of AMMB retreated after hitting its peak of RM5.32 on the 17thof November. However, it was supported by the 14, 21, 31 EMA and price rebounded again and resumed its uptrend. However, as indicated by B, price of AMMB failed to reach the same peak as A, but instead, forming a lower-high at RM5.06 level.
Based on the analysis of AMMB, a lower-high formation is an early signal suggesting that it might be forming a downtrend. If price should break below RM 4.80 level, it would means the end of the uptrend, and the beginning of a downtrend. Thus a signal to take profit or cut-loss.
In contrary, if price should break out above RM5.06 level, with substantial volume, it would be a signal of the uptrend resumed. If investors were to buy based on this signal, then the 14, 21, 31 EMA shall serve as the dynamic support as well as the trailing stop reference.
| Rolling 4 Q PE | 14.59 times | Dividend Yield | 1.64% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/3/2009 | 8 sen | 2.55% | 14.69% |
| 31/3/2008 | 6 sen | 1.56% | 11.13% |
| 31/3/2007 | 5 sen | 1.33% | 1.33% |
| 31/3/2006 | 5 sen | 1.77% | 1.77% |
| 31/3/2005 | 4 sen | 1.42% | 0.99% |
Table 1: AMMB yearly dividend yield, dividend, and Net Profit Ratio.
Conclusion:
There are some characteristics of a downtrend, and other than the above mentioned Lower-highs, investors can also apply the Bollinger Bands as a confirmation. No one is sure how long will a downtrend last, but whether it is a long term or short term downtrend, a smart investor would always avoid unnecessary risk, and avoid buying cheap stocks during a downtrend.
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