KLCI at 20 month low – what next?

An extended selling pressure is seen into this week. A severe selling in the KL futures hampered further the already weak sentiment and the political situation could deteriorate significantly. Foreign favored stocks, like Gamuda, some banking stocks closed sharply lower and market breath stayed negative as losers topped gainers by a wide margin.

The KLCI is retesting the next downside of 1,050 (Tuesday’s closing at 1,069), and I am fairly sure that it might dive further on follow through selling momentum with likely poor volume participation. The next support level is at 975-980. The immediate thing to watch now is the DJIA, which has dropped from the upper band of the downtrend channel. It might encounter another round of selldown, if the index failed to return above the 21-day SMA in coming sessions.

More downside is expected to come from the plantation and banking sector, which take up more than 35% of the KLCI weighthing. The steep correction over the past 5 weeks suggests that there is still room for correction and any price recovery effort would be good opportunities to go ‘SHORT’.

The Ringgit is weaker as the USD is broadly firmer against major currencies and I still prefer holding cash, as the next best investment alternatives. Wall Street fell sharply for a second straight session Tuesday after a hefty jump in wholesale inflation and a drop in new home construction gave investors more reason to believe an economic recovery is far off. Oil prices rebounded, jumping back above $114 barrel after the dollar weakened against the euro and a rally in heating oil pulled new buyers into energy markets. Oil Minister Rafael Ramirez said in a statement Tuesday that if prices continue to ease, "Venezuela would have to analyze the possibility of a production cut," a move that would likely send prices higher.