Possible 1:
Chart 1: KLCI chart from 14/1/2009 to 29/9/2009
Possible 2:
Chart 2: KLCI chart from 11/6/1996 to 12/1/1998.
Chart 3: KLCI chart from 14/8/2009 to 10/12/2009.
As shown on Chart 3, we shall notice that both chart 1 and chart 2, when the KLCI has just broken below the the uptrend, are quite similar. This is quite typical for a breakout of an uptrend, and this is why technical analysis needs to study the history of chart to find out the repetition of behavior.
As indicated by A, the KLCI rebounded by resisted by the L1 line, it means that the KLCI has to break above the L1 line to resume its uptrend. Meanwhile, the KLCI failed to break above the Bollinger Middle Band, and when the Bollinger Bands expanded last week, the KLCI ended lower, and the downside biased movement is likely to carry on until the Bollinger Bands contracts again.
As indicated by B, the KLCI is supported by the 1257 WinChart Automatic Fibonacci Retracement, (23.6% retracement) Therefore, the KLCI has not formed a confirmed downtrend yet. In other words, this is still an early sign of a possible downtrend formation.
The effect of a weak broad market:
Chart 4: Maybank, from 3/9/2009 to 10/12/2009
As shown on chart above, the chart of Maybank and theKLCI is rather resembling. Due the sudden fear of the Dubai incident, the downside movement has an early effect, and price of many stocks ended lower. Also, the downside gap will be filled up, usually.
In other words, Maybank and KLCI chart has started its negative movement, as ignited by the fear of Dubai debt worries. Meanwhile, the trend for Maybank is likely to be in parallel with the KLCI's, and as long as the price is still below the Bollinger Middle Band, the immediate outlook is still on the negative side. Supports for Maybank are found at RM 6.7 (50% retracement), RM 6.60 (61.8% Retracement )and RM 6.50 (76.4% retracement), while the resistance is at RM 6.80 (38.2% retracement)
How to pick stock:
While the KLCI is having a risk of forming a downtrend, a short term risk taker may pick up some stock for short term trading. However, the risk associated with short term trading, especially with the KLCI weakening is usually high. Therefore, a careful trading plan has to be in place before any attempt for short term trading, a trailing stop method.
Types of Trailing Stop method: (1) Fixed Price Retreat Trailing Stop. (2) Dynamic Trailing Stop. (3) Yesterday's Low Trailing Stop.
Yesterday's Low Trailing Stop method is suitable for short term high risk type of stock. The idea is simple, that a short term rally should not have its price breaking below its yesterday's low, and the difference between one's entry cost and yesterday's low should be the maximum loss. When price rallied, traders should lift the trailing stop level using the latest's yesterday's low. When price should break below yesterday's low, it would be a signal to take profit, or to cut-loss.
Below are some case studies:
Chart 5: Faber, from 28/9/2009 to 28/12/2009.
After resisted at RM 1.51 (13/11/2009), price of Faber retreated as a form of technical correction, and even breaking below the Bollinger Middle Band. However, as indicated by A, price returned to above the Bollinger Middle Band, with the Bollinger Bands expanded, thus giving a bullish signal. When price advanced with the bullish Bollinger Bands signal, it broke above the RM 1.51 resistance as well.
Chart 6: Gadang, from 15/09/2009 to 9/12/2009.
The technical signal of Gadang in Chart 6 is similar to Faber in Chart 5. As indicated by A, price break above the Bollinger Middle Band and the Bollinger Bands re-expanded with price above the Bollinger Middle Band, thus giving a bullish signal.
Chart 7: Time, from 15/09/2009 to 10/12/2009.
As indicated by A, the Bollinger Bands of Time is contracting, suggesting that it is consolidating while preparing for a new movement. If price should break above the Bollinger Middle Band with the Bollinger Bands expanding, it would be a bullish signal. If trader should follow the Bollinger Bands bullish signal as a buy signal, then a Yesterday's low trailing stop method should be applied.
Conclusion:
While the KLCI is having a risk of forming a downtrend, investors could choose to invest for the short term, provided with a sound trading plan, especially a cut-loss plan. Nevertheless, the risk of trading against the broad market trend is still high, and therefore, when things do not work out, it is always a good idea to cut-loss.
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