What's going on in Malaysia's stock market? Having dropped tremendously since the election, is there any hope for the bulls?
One thing that regular investors and traders of the KLCI will notice is this... Foreign Funds have been selling non stop since the election. Along with it, many stocks have suffered a tremendous sell off.
I suppose many many Malaysian investors have experienced significant losses as the market sold off.
The outflow of foreign funds are a result of uncertainties in the new Malaysian government's economic policies as well as a negative trend in the index's charts.
I even joke about it in my Telegram group that Foreign Funds seem to follow the 60 min trend. When the trend is down, foreign funds will be selling non stop. Well, whether you agree or not, it is extremely important for Malaysian traders and investors to focus on the trend.
If the trend is up...stocks will do well.
If the trend is down...the markets will go down.
Anyway, this might seem foreign to many, so let me show you some charts of the KLSE.
I think my regular readers and group members will know that I attach a high value to the 20 period moving average as well as the 50 period moving average.
I consider moving averages as a foundation of trend following. They can help investors and traders to identify the trend. The purpose of identifying a trend is because you do not want to be trading against the trend. If the trend is negative and you stay invested or buy stocks, it is like standing in front of a lawn mower and expecting things to be all right by the end of the day.
In very basic terms here are the rules to the 20 MA and 50 MA:
That is the general rule. But of course analyzing the stock market is not as easy as checking whether prices are going above or below some moving averages. After all, the ability to correctly determine what the market will do lies in the skill of the analyst or trader and not some magical lines.
The above is the daily chart of the KLSE.
The red line is the 20 MA while the blue line is the 50 MA.
When the KLSE is above the 50 MA, I have conveniently colored the green to represent a bullish environment or money. On the other hand, when the KLSE is below the 50 MA, I have conveniently colored the part red to represent a bearish environment or what your account will most likely look like if you bought stocks or hold on to stocks during that period.
One of the rules I always tell my readers and friends in the group is to be on the watch for the 50 MA whether in the daily time frame or 60 min time frame or for intraday trading purposes, the 5 min time frame.
Generally, if the index or stock is below the 50 MA in a particular time frame, you can expect the market or stock to behave badly.
So from the chart above, a great time to be long stocks was during December of last year to May 2018. There was a slight dip below the 50 MA in April this year which gave a first clue to the damage that was to follow.
Right after the election, the stock market plunged into the red territory (below the 50 MA) and from there onward you could see heavy selling in Foreign Funds and also a plunge in prices for most stocks in Malaysia.
I know this sounds crazy or too simple...
How can the market experience bullish modes or bearish sell offs based on a simple thing like a moving average?
Having been in the markets for a long time...I can tell you this...
Many extremely experienced foreign investors and traders are trend followers. They will employ some kind of trend following filter and one of them is the moving average.
Some fund managers refuse to buy stocks that are below the 200 MA. While some attach a lot of significance to the 50 MA.
Well, the first thing you will notice is that the KLSE is still in the red zone or in other words below the 50 MA.
So, for the mid term...things will still be quite risky for investors.
The KLSE is also still below the 20 MA...which tells us that short term wise the market is still in a bearish environment. But there is a possibility that the KLSE might go back above the 20 MA soon and this will be one of the first signs of a bullish case for the KLSE.
But what investors should really look for is for the KLSE to go back above the 50 MA. That is usually where the power bullish moves will happen.
To help us have a big picture of the market, we always need to take a look at the weekly chart of the main index. The above chart shows us the weekly chart of the KLSE.
As you can see, the index is pretty weak. Much heavy selling happen after the May 2018 elections and the index even dropped below a significant weekly uptrendline. I must say the picture for the Malaysian stock market is not a healthy one.
However, there is some respite for investors as KLSE is approaching a weekly support area.
We hope that the market may be able to find support there. We must check the daily chart for signs of bottoming. If a bottoming does not happen, we will likely have a consolidation and then a breakdown and this will send the market even lower.
The significant area of support will be the 1600 area.
Let's zoom back in to the daily chart.
Well, if we take the measured move from the recent selling, the target is almost met.
Since the target is almost met and we are at a support area in the weekly chart, it is only relevant for us to start to look for signs of bottoming in the daily chart.
Chart patterns like:
can help to pinpoint a reversal in the KLSE.
Those are just some chart patterns to help us spot a bottom. But to fully understand how to spot a bottom, you might want to check out these articles I have written in the past.
Perhaps you might want to go through the list and see how many criterias that the KLSE manages to satisfy. If you see many of the signs happening in KLSE, then we might be looking at a possible bottom.
All the above is just from a technical point of view.
But in my opinion, for a country's index to go back up and be in a bull mode, the country needs to have a growth story. Since the election, the present government has planned to cancel many projects and reign in spending. While that is good to rebalance and rethink things, one needs to find a growth story.
Actually Malaysia needs growth stories...many of them. Money must be coming in and the government has to come up with plans to get more money to its coffers. After that, they will need to spend the money wisely to build projects that will benefit the country in the long term.
I believe some of the things that are really needed to implement will be extremely unpopular. But if the government can come out with plans that will grow the economy, the market will reflect this and not only will it attract investors, it will also benefit Malaysian citizens in the future.
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