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Technical Analysis Lessons From KLCI's Chart

In today's article, we will be examining the ups and downs of the KLCI and why it moved the way it did. We will also examine the chart patterns that hinted to the moves.

For those who are not Malaysians or are not aware of the political situation in Malaysia, I would like to point out to you that Malaysia underwent a general election on May 9 2018 which falls on a Wednesday.

Following the spectacular win of the opposition led by former (now current LoL) Prime Minister Tun Mahathir, the election ended 61 years of rule by Barisan Nasional. This led to many uncertainties in the economic landscape of Malaysia. 

Thursday was supposed to be a trading day but the new government announced a holiday on Thursday and Friday, therefore, the stock market opened on Monday the following week on May 14 2018.

The stock market rallied a bit after the election but the uncertainties surrounding the changing of the guard caused the KLCI to fall.

But as you will see below, there are warnings signs from a technical perspective. 

Therefore, a trader or investor will do well to take heed of not only the news but also the technicals of a country's main stock market index.

The stock chart above shows us the daily chart of KLCI.

Let us start from the left and work our way to the right hand side of the chart.

The start of 2018 marked a bullish run up for the KLCI. That's because we had a bullish cross in the index's chart. Bullish crosses are often used by traders to help them determine the start of a new uptrend.

They are not perfect but many times they will give us clues on what will likely happen to the stock market. In this case, the bullish cross in KLCI hinted of a nice bullish run up.

The moving average that I use is the 20 MA and the 50 MA. This is different from the golden cross that many are familiar with. The bullish golden cross is where the 50 MA crosses back above the 200 MA. I find it a bit slow therefore I like to use the 20 MA and 50 MA.

Notice how the Malaysian market went up when it was trading above the 50 MA.

In early April 2018, the index dropped below the 50 MA for the first time that year. Although there was a quick recovery where the index traded back above the 50 MA, this was a first sign of weakness that was to follow. Indexes that are extremely bullish rarely drops below their rising 50 MA.

The candle with a large movement and wicks on the top and bottom is the first trading day after the 2018 election. You can see how volatile the trading day is with the length of the candle.

KLCI tried to rally up the next few days but it was never able to go back above the 50 MA. The 50 MA now acted as a resistance.

What happened next to the KLCI was the appearance of a bearish cross

This is the opposite of a bullish cross. The 20 MA crossed back below the 50 MA and this is usually a negative sign. From there, the KLCI slashed through a support area.

Support areas in this case are the prior lows that was established in the trading range from February to May 2018. An index that breaks below a support is weak and this is usually followed by more selling which is what happened to KLCI after it broke below support.

When there is a quick sell off, there is usually a rapid rise back up as well. KLCI quickly rallied back up to the 1800 area.

One of the principles of technical analysis is "A support once broken will now become resistance". Another thing is the 1800 round number also now acts as a psychological resistance

A topping tail candlestick pattern immediately formed when the index reached the 1800 area. The relief rally actually formed a nice short term uptrend line which traders can draw. Once the index breaks below the short term uptrendline, this caused the index to sell off once again. 

The Significance Of Breaking An Uptrend Line

From there, the index had a nasty sell off until it reached the 1660 area. 

Why did it stop there?

When you look at the weekly chart below, you will realize that the KLCI is very near long term support.

The other thing that I did not include in the chart is the sell off had already met a measured move target. You can read more about it in a past analysis that I did on KLCI. Technical Analysis Of KLSE July 2018.

The fact that KLCI was at long term support and that it met a measured move target will alert experienced traders to begin finding a bottom.

The bottoming process appeared in the form of a double bottom in the KLCI. Some may see it as an ascending triangle bottom as the second low is slightly higher.

As the pattern forms, the KLCI broke a mid term downtrend line and then it broke back above the 20 MA which it had been trading below for quite some time. 

And that is the technical reason why KLCI had a rapid nice run up.

The chart above shows the weekly chart of KLCI.

The price action of the KLCI from early 2018 to May 2018 was that of a weekly ascending triangle pattern. This ascending triangle actually was a bullish pattern as the chart pattern helps to absorb the supply that comes in from former highs.

If you study support and resistance, you will realize that old highs can act as a resistance area. Which is why many stocks tend to sell off when it reaches old highs. People who lost money there gets out breakeven.

The index actually tried to breakout of the pattern.

However, the election results of the May 2018 general election quickly provided a catalyst to form a failed ascending triangle.

Failed patterns can be very powerful to help send the index lower.

There were a few signs of the topping process in KLCI:

  1. A bearish weekly MACD sell signal
  2. Bearish divergence in the stochastics
  3. Failed weekly ascending triangle

We won't go into detail into each one of them. But a bearish sell signal is self explanatory. A bearish divergence happens when prices and the indicator diverge. And as mentioned above, a failed chart pattern can often have a negative effect on price.

The end of the sell off happened when KLCI dropped to long term support.

I have highlighted the long term support with green color. When there is heavy support below, it often takes lots of selling pressure to break below it. If the pressure is not strong enough, a rapid bounce up can happen.

Some bottoming signs start to appear even in the weekly chart:

  1. A weekly bottoming tail
  2. A weekly bullish engulfing pattern
  3. An oversold stochastics and then a buy signal
  4. A MACD Valley which hinted of a possible slowing momentum

When you combine the technical and price action in the daily chart with the weekly chart, we can often get a clear picture of when the index is about to bottom.

There you have it.

Hope this helps you to understand why the index moved the way it did. : )

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