Bursa Malaysia – Have we reached the bottom?

Why is this question important?

Everyone is asking this question but do you know why it’s important?

Well… maybe not so much? We’ve had a nice streak of green these past few weeks despite COVID-19 and volatile oil prices.

Why would we want to know if we’ve reached the bottom or not? And how do we tell whether we’ve reached the bottom or not? These are some questions that we will be looking at in this post as well as the answer to this all-important question.



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Why do we want to know if ‘we’ve reached the bottom’?

When we say ‘We’ve reached the bottom’, what we actually mean is ‘The Market’. Not individual stocks, not economic sectors, not our personal portfolios.

Unless we are heavily invested in funds or indices that track the market or we hold a huge portfolio that consist of so many stocks that it essentially follows the market, one might question the point of paying any attention to what the market is doing. After all individual stocks don’t necessarily follow the market.

True, individual stocks may not always follow the market but more often than not, stocks will tend to follow the market that they are a part of. So if the market is bullish, we are more likely to find stocks that go up; although there may be stocks that go down. If the market is bearish, stocks are more likely to go down. Although we may find stocks that go up against the market, we are more likely to find stocks that go down.

What this means for traders and investors is: if the market is bearish, we don’t want to be putting in too much into bullish positions because the probability of our position failing is much greater. In a bull market, breakouts are more likely to work because the general atmosphere is one of buying and holding stocks and euphoria. In a bear market where most people are wary of buying and holding stocks and are more likely to sell when the opportunity arises then breakouts may not work so well. How can a breakout be sustained if everyone is clamoring to sell on the first price jump!

How do we tell what ‘The Market’ is doing?

‘The Market’ is essentially the overall general movement of ALL the stocks in a particular market. It is the sum of all the buying and selling decisions made by all participants in the stock market. So how can we keep a tab on all these activities?

Everything is summed up in the movement of the market Index. For the Malaysian stock market, this is the Kuala Lumpur Composite Index (KLCI).

KLCI multi-decade view

Historically anyone who had invested during the big dips in the KLCI would have made a tidy profit – both in the very long term (think decades) and even in the not-too-long term (months – several years) as the market recovered.

In March 2020, the KLCI has touched the long term monthly chart 200 period moving average (MA200). By virtue of this, from historical records, it may be a good time to chip in positions. At the very least, current prices are likely going to be less risky than what we might get in the months to come.

Nevertheless, the monthly April 2020 candle close is still below the MA200. Continuation of the bear is still not out of the picture. We’ll need to wait for the May performance, and maybe June to determine the markets immediate direction.

KLCI monthly chart

Another important factor to consider is this long term double top pattern. After breaking below the 1615 level, the KLCI tested this support-turned-resistance area several times before confirming it and heading lower in January 2020. It reached the technical target price (TP) of the double top break-down in March 2020 with a new support level of around 1315.

Having reached the TP for the double top break-down, the market may rebound and retest previous resistance levels – potentially going towards 1615. While this would indicate a possible bullish move in the immediate future, we should not get ahead of ourselves and forget the fundamental rule of waiting for a valid reversal signal.

Double bottom reversal

If history is any indication, we may expect to see a double bottom reversal pattern.

Previous double top

Personally I hope for a swift and sustained recovery of the Malaysian stock market but technical charts do not allow for feelings. A double top is a double top. It’s a bearish signal through and through and the one we just fell from was formed over a long period of time which means it is stronger than one formed on shorter time frames and the bear market that it heralds may potentially last for some time.

So how did the KLCI fare in previous double tops?

The last time we had one (on the monthly chart) was in 1997-1998. We reached the double top TP (purple arrows), rebounded for a while before falling again, even further.

After the break-down from the double top in August of ’97, it took the KLCI 9 years to get back to the base and sustain above it, and 13 years to break the double top peak and maintain that level.

It’s also interesting to note that the previous double top formed over 3 years from 1994-1997 and the current double top formed over a 4 year period from top to top.

Trend

ADX

Although in the very-long term – shown by the up-sloping MA200 – the market is in an uptrend, in the more immediate term, the KLCI is in a downtrend as shown by the strong divergence of the -DI (red line) and the +DI (green line). Even if we do see an upwards move – and we may see this in the coming months – it will be in the context of a retracement rather than a true uptrend.

Seeing as we may have just reached the bottom of a downtrend (or one of the bottoms, it’s not possible to say with certainty), it may be a while still before we truly see a strong uptrend – where the +DI is trending above the -DI and the ADX is sloping upwards.

Conclusion

As of early May 2020, the immediate and longer term direction of the KLCI is not yet clear. Investors and trader will need to closely monitor the market in the next few months to come for a clearer picture.

Historically we can see 4 things:

  1. We may be in for more downside but…
  2. Buying equities in stages over the next several months may give good medium and long term returns.
  3. No. 2 may reduce our risks.
  4. KLCI is in a downtrend. Any upwards move is likely a retracement. Looking at the ADX and DI indicators, it may be a while still before we see a true long term uptrend.

Considering all the above, as a trader (occasional one) I am looking to take advantage of the potential rise in the market over the next several months (unless May points to an immediate fall). However, as KLCI is still technically in a downtrend (shown by the ADX and DI), I am being extra picky with my entry points. I am less inclined to enter during rallies (like the one we saw the past several weeks. I added a bit but was a net seller), but will consider entering positions during falls.

Mainly though, I will look for long term investing opportunities. Any trading activity is conducted as part of an investment plan. While the market is in a long term downtrend, the probability of succeeding in a bullish endeavor is reduced compared to if the market was in an uptrend. That being said, the current downside risk for long term investing has been reduced.

Downside risk is reduced – but not gone

Seeing as the ADX has already moved so high and the RSI has fallen so low, further downside risk is reduced. The current condition would be suitable for bargain hunting.

Due to the possibility of a prolonged suppressed market – as well as personal preference – I am choosing to be heavy on good bargain income stocks.

Their dividend yields have changed since I wrote about them a month back but these dividend growers are still my favorite stocks. I own most of them as long term income investments and have traded some of them in the past month or so and hope to get them at better prices in the months ahead:

2020 Dividend Growth Stocks Bursa Malaysia

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