In a minor rebound mode for now

US stocks rallied amid optimism that lawmakers will reach a budget agreement before the end of the year. A budget compromise would help avert the “fiscal cliff”, which could result in more than US$600 billion (RM1.83 trillion) in tax increases and spending cuts taking effect next month.

A few dozen Republicans have joined a bipartisan call to break the impasse between President Barack Obama and House Speaker John Boehner over taxes for the highest earning Americans. The Republicans signed a letter calling for exploration of “all options” on taxes and entitlement programmes, a signal that some rank-and-file members are prepared to bargain. The Dow rose 82.71 points to close at 13,034.49 on Wednesday.

The European Central Bank (ECB) may refrain from cutting interest rates any further after its pledge to buy government bonds and thus lower borrowing costs. This boosted confidence that the eurozone would emerge from recession next year.

According to a survey on Bloomberg, 56 out of 61 economists predict that ECB policymakers who met in Frankfurt yesterday would hold the benchmark rate at a record low of 0.75%. Italian and Spanish bond yields have plummeted since ECB president Mario Draghi promised to do whatever it takes to save the euro, by introducing the unlimited bond purchase programme.

The FBM KLCI traded in a boring,  lacklustre price range of 18.34 points with very low volumes of 0.73 billion to 0.88 billion shares done. The index closed at 1,616.23 yesterday, up 2.44 points from the previous day as blue-chip stocks like British American Tobacco (M) Bhd, Genting Bhd, Public Bank Bhd, Petronas Dagangan Bhd and Tenaga Nasional Bhd caused the index to inch up in a miniscule bout of local nibbling.

After the rebound from the late September low of 1,595.85, the KLCI peaked at 1,679.37 on Oct 29 this year. A break of the critical 1,669 short-term support level (on Nov 2) led to a plunge towards a temporary low at 1,590.67 on Nov 28. As such, the weaker support levels are seen at 1,582, 1,590 and 1,610, while the resistance levels of 1,616, 1,638 and 1,679 will cap all market rebounds.

The rise from the 801.27 low (October 2008) to the current all-time high of 1,679.39 represents an extended Elliott Wave  Flat  rebound in a Pseudo-Bull rise.  Tactically, investors will liquidate on rallies due to the index’s negative and bearish divergence signals.

Continue to sell on any price rally as ample bearish divergence signals are apparent. The Commodity Channel Index (CCI), Directional Movement Index (DMI) and Oscillator signals have still remained negative, while the Moving Average Convengence-Divergance (MACD) and Stochastic have turned marginally positive.

In the medium term, the index is definitely headed towards 1,557 and 1,522 on its daily chart after any initial pyrrhic rebound to 1,624.55 (38.2%) and 1,635.02 (50%) zone. The longer term and sustained break below the index’s vital support line would imply longer-term downside for the index towards 1,320. The 1,320 downside target level is measured via classical charting techniques using the measuring objective of a Rising Wedge breakdown.

Currently, the monthly chart for November 2012 is showing the dreaded Bearish Engulfing candle pattern. This depicts an obvious picture of a major index high being formed at 1,679.37. Tactically, investors will remained sidelined and adopt a wait and see investment attitude in the next few months.

Alternatively, they could sell their current positions if the index rebounds and remain more in cash. They could also attempt some short positions on the KLCI Futures contracts if the market retraces up.

Despite the miniscule rebound outlook for the index, our featured chart sell for this week is Malaysian Resources Corp Bhd (MRCB). In its results for the third quarter of financial year 2012, it has incurred more borrowings following the government’s decision to take over the Eastern Dispersal Link, which triggered the terms of repayment of the loans secured for the financing of the construction. MRCB also incurred additional drawdown of the project loan in accordance with the progress of the property development activities at Kuala Lumpur Sentral.

Furthermore, RAM downgraded the long-term ratings of MRCB’s Southern Link Bhd’s RM845 million secured senior sukuk (from BB3 to C3) and RM199 million junior sukuk (from C1 to C3).

The downgrade was mainly due to MRCB’s Southern Link’s cash shortfall in meeting the next profit payments on both the senior and junior sukuk this Dec 21. MRCB’s Southern Link has had to depend on an advance of RM5.3 million from its sister company (an engineering, procurement and construction contractor) to meet an interest payment of RM220 million on its syndicated transferable term loan.

Maybank IB currently does not have fundamental coverage on MRCB. A check of Bloomberg consensus data reveals that there are currently 12 research houses that have coverage on the stock with eight “buy” calls, three “hold” and one “sell” call. MRCB is currently trading at an unfavourable lofty forward price-earnings ratio of 28.7 times and a low indicative dividend yield of 1.24%. Its gearing ratio remains extremely high at 3.7 times.

MRCB’s share price has made an obvious plunge since its weekly Wave 5 high of RM2.60 in Aug last year. Since that weekly Bearish Engulfing high, MRCB’s chart has moved into daily, weekly and monthly downtrends to its recent low of RM1.48.

As it breaks below its recent key critical supports of RM1.94 and RM1.72, look to sell MRCB on any rallies to its resistance areas as the moving averages depict very firm short- to longer-term downtrends for this stock.

The daily, weekly and monthly indicators (like the CCI, DMI, MACD and Oscillator) are firmly negative and now depict the obvious indications of MRCB’s eventual plunge to lower levels. We expect MRCB to remain very weak towards its support levels of RM1.48, RM1.53 and RM1.56. It will attract some heavy liquidation at the resistance levels of RM1.57, RM1.81 and RM1.94. Our medium-term technical downside targets for MRCB are RM1.48 and RM1.20.

Lee Cheng Hooi is head of retail research at Maybank Investment Bank. The views expressed in the article are the opinions of the writer and should not be construed as investment advice. Please exercise your own judgment or seek professional advice for your investment decisions. Technical report appears every Wednesday and Friday.


This article first appeared in The Edge Financial Daily, on Dec 7, 2012.


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