The market was in a very bearish and volatile mode in the past few weeks since the Covid-19 infections start to grow at a very fast pace. Global markets shared the same sentiment. Equity markets fall into a technical downtrend (Most analysts defined a bear trend as when the benchmark index falls 20 per cent from its high).
The Covid-19 pandemic has caused havoc all around the world and many countries including Malaysia has implemented a movement control order that prevents non-essential businesses to be open and direct its people to stay at home to minimise the spread of the virus.
Many businesses are starting to suffer from not being able to operate and those paid by the day’s work are without income. People are unable to spend. This caused a vicious disruption to economic activities. Governments are now scrambling to find solutions to minimize the disruption by giving out economic stimulus packages. The Malaysian government recently announced a RM250 billion economic stimulus package for the people in all walks of life.
We are living in an unprecedented time. We do not know how long this pandemic is going to last and how it will affect local and global economies. The market is in a fearful mode and thus the sell down in the past one month.
For contrarian investors who live by Warren Buffett’s “Be fearful and when everyone is greedy and greedy when everyone is fearful”, they are now trying to figure out whether it is time to be greedy since the market is now fearful.
To investors with limited funds, unlike Warren Buffet, it is easier said than done. It is not easy to start accumulating when markets are falling and especially in a panic environment because the market may fall even lower. It is akin to catching a falling knife. Those who attempt to do so must have a clear trading and investment plan. Also, we would not know when the market is going to recover and therefore one must have the holding power.
Daily FBM KLCI chart as of 27 March 2020
So, the question that most market participants are now asking is “Has the market bottomed out?”. I’ll provide my opinion based on my knowledge of technical analysis.
For those who have been following my commentaries, the support level I mentioned in my previous articles was 1,250 points. When the 1,500 points level was broken, it signals a downtrend as that level is the confirmation level of a long term double top chart pattern. The index fell below the support level temporarily two weeks ago but rebounded and ended up that week above 1,250 points at 1,303.28 points.
The index rebounded this week as governments globally start giving out economic stimulus packages. The world’s largest economy, the United States, has approves a US$2 trillion package to support its economy. The market rebounded and closed three per cent higher at 1,343.09 points last Friday.
Whether the low of 1,207.80 is going to be the bottom depends on how this rebound is going to take shape. Based on my observations from the previous aggressive declines (circled on the chart), if the index rebounds and unable to climb above 50 per cent from the decline, the chances of it falling further is high. That’s what happened in February 2008. If you noticed, when the index rose above 50 per cent from the decline, the index was sustained and the trend continues.
Today, that 50 per cent is at 1,420 points. Therefore, the market is set to recover if the index is able to climb above 1,420 points. However, if it fails, the market may make a new bottom. The next support level is at 1,005 points, based on a 47 per cent decline from the historical high. The 47 per cent decline was the decline from the historical in 2008 before the index bottomed out.
Remember one thing, the FBM KLCI is an aggregate performance of 30 stocks. Other stocks performances may be different from the index. It is best to analyse on an individual stock rather than using the index as the only benchmark.
The above commentary is solely used for educational purposes and is the contributor’s point of view using technical al analysis. The commentary should not be construed as investment advice or any form of recommendation. Should you need investment advice, please consult a licensed investment advisor.