Did you know that intermarket analysis often points out big events like a bull market even before it happens? In this article you will learn how studying currencies allowed traders and investors to spot a bull market in the Malaysian stock market. Malaysia is a South East Asian country that is north of Singapore. For many people around the world, what comes to mind is the Petronas Twin Towers in Kuala Lumpur or the 1MDB Scandal that made the front page of the Wall Street Journal.
Malaysia's Kuala Lumpur Composite Index or known as the KLCI has not been very good to local investors for quite a number of years. In 2014 to 2015, the Malaysian stock market formed a weekly head and shoulders top which marked the beginnings of a bear market in the country. Coupled with the 1MDB scandal that plague the government, it was a recipe for a quick crash for the KLCI in 2015.
As you can see from the chart above, the Malaysian stock market did not perform very well in the past few years. In 2016, the stock market rose a little only to drift lower and then moved sideways. It was only in early 2017 that the index broke a weekly downtrendline and that marked the beginnings of a super bull market in KLCI. At the time of this writing in April 2017, the Malaysian stock market is in the middle of the super bull run. I believe that it is still in the middle and therefore have some halfway to go.
Below are some intermarket analysis I have done and I have put them here for future reference of students of the Malaysian stock market.
Double tops are bearish topping patterns that are often found in stocks, indexes, commodities and even currency pairs. A double top in daily charts is significant because it often marks the beginning of a crash. When it happens in the weekly charts or the long term monthly charts, it marks the beginning of something that is very significant which might have an impact for years to come.
In the chart above, we can see how the USD/MYR made a double top in its monthly charts. When traders see these kind of double top in the monthly charts of currencies, some of the older ones will remember the similarity that it has with the GBP/USD in 1992.
What happened to GBP/USD in 1992?
Well, it was one of the most significant events in currency trading when George Soros the famous hedge fund manager behind Quantum Fund broke the Bank of England. The legendary hedge fund manager made $1 Billion overnight shorting the pound and by the end of everything, he made about $2 Billion.
The above chart is the monthy chart of GBP/USD. Notice how the currency pair chart formed a double top which looks almost the same as the monthly double top that USD/MYR is forming? I'm not very sure if this is the chart that George Soros saw but the GBP/USD was really making a monthly double top and it was quite a bearish pattern. It is therefore not surprising that the pound collapsed in September 1992.
Intermarket analysis is a branch of technical analysis which studies the relationship between the different asset classes in the world. Intermarket analysis practitioners will look at the relationship between bonds, currencies, commodities and the stock market. Each one has an influence over the other and the movement in one asset class can affect the movement in another asset class.
For example, when the stock market drops because of geopolitical fears, usually the price of gold will go up. That's because investors will flock to the safety of gold. But when the stock market is in a bull run, investors will tend to leave the safety of gold to put money into the stock market. Therefore, the price of gold will drop.
The USD/MYR has a very important relationship with the Malaysian stock market. Here is the general rule with regards to their relationship:
As you study the chart above, you will realize the important relationship between the Malaysian stock market and the USD/MYR. The candlestick chart on the top is the KLCI index while the lower bar chart is the USD/MYR. What you will notice is this:
Sometimes its really funny how an event in one market can bring inflows of money into another market that seems not to be correlated. What has the US Dollar have to do with a small country in South East Asia? Well, it has a lot to do actually. That's because foreign funds will always want to find a good place to invest when the US Dollar weakens. A local currency that gets stronger after a long decline in relation to the USD means that the economy is getting better although the fundamentals have not even shown that much improvements.
Take a look at the chart above and you will be able to see how valuable intermarket analysis is to the participants of the stock market. There are two significant events in the chart above. The first one is in January 2017 when the Malaysian stock market broke a downtrendline while the US Dollar Index broke an uptrendline. This told traders very clearly that the Malaysian stock market was bottoming. It is time to begin to invest in Malaysia.
The second significant event is in March when the US Dollar Index looked like it is beginning to form a head and shoulders top in the daily chart. Once the Dollar Index broke an uptrendline at the right shoulder, there was a massive inflow of foreign funds into Malaysia in March 16 and March 17 2017. These dates coincided with the breakout of KLCI above the weekly resistance.
Sometimes I'm surprised myself at how beautiful intermarket analysis and the convergence of technical concepts can produce some of the most remarkable results in the stock market. That is why we should learn and study intermarket analysis as much as we can.
The chart above shows how foreign funds keep on entering the Malaysian stock market since January 2017. It may be a surprise to many local players why foreigners keep on buying the Malaysian stock market. But if we study intermarket analysis, it will be very clear to us why great traders do certain things.
Well, we are still halfway through a bull market. We still have a long way to go before the KLCI reaches its former higher. But the KLCI has gone a long way up since it bottomed around 1600. With a general election around the corner, it will not be surprising if the stock market moves higher.
The Malaysian stock market has a history of moving higher in an election year. It also has a tendency to go up a few months before the date of the general election. Which is why the incumbent government has always hold on to power. Malaysia has never had any other government except the incumbent party called Barisan Nasional.
You might be surprised at how the stock market can be used to predict an election. It has a history of more than 80% correct in predicting election results all over the world. Do read How Stock Markets Around The World Have Correctly Predicted Elections 80% Of The Time.
In order to know why foreign investors have been flocking into the Malaysian stock market, we also need to learn about the risk vs reward that awaits them. Take a look at the charts below and you will understand why investing in Malaysia is such a tempting prospect.
Ever since the Malaysian stock market drifted sideways since 2015, it has been gradually absorbing all the supply that the weekly head and shoulders top have made. So, there was actually what traders call a tradeable void which will enable a breakout to former highs pretty easy to follow through. When the KLCI broke above a weekly downtrendline, it was a signal to investors and traders that the stock market was ripe and ready for a big bull run which might propel it upwards into old highs.
One of the stocks that foreign investors were loading up on is Malayan Banking Berhad or MBB. This stock is the largest company by market capitalization in Malaysia with a market cap of almost 100 Billion MYR or roughly about $22 Billion USD. When a country's stock market looks good to invest, investors naturally will want to look at some of the largest market cap stocks. You can see from the chart above how MBB has been the target of large foreign inflows. The stock experienced spikes of heavy volume every time it broke above a consolidation.
When a country is in a bull market, some of the best ways to invest is to purchase a stock with good fundamentals and in an uptrend. One very good stock in Malaysia is MYEG which is an e-commerce website that allows people to pay bills and other things online. It is also an election counter in Malaysia. One great way to invest in the company was to buy it every time it broke above a box. The stock is an uptrend and with such a good stock market in Malaysia, buying it every time it broke above a consolidation is a great way to invest in the stock.
Intermarket analysis is something that not many new traders or even old traders do. Not all investors are even aware of the importance of this discipline. For those who study the relationship between currencies and other asset classes such as stocks, bonds and commodities, it will always give them an edge over other market participants. So, the next time you want to invest in a country, take a look at the country's currency in relation to the USD. You might find something that may surprise you.
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