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Earlier last week, the market declined further as tension in the middle continues to rise that also caused crude oil prices to soar. The FBMKLCI went to as low as 1,474.38 points on Monday but bargain hunters came in and the index rebounded to close at 1,506.88 points Thursday. The 1.2% one-week decline two weeks ago was cancelled out this week as the benchmark index closed 1.1% higher than the previous week.

There is a shift in market sentiment last week. Attention has shifted from the Libya crisis to better corporate earnings, stronger Ringgit and rebound in other regional markets. The selling pressure has eased last week. Trading volume continues to fall significantly last week with only 1.2 billion shares traded on a daily average last week as compared to 1.8 billion shares two weeks ago. The increase in the index and lower volume shows that resistance was weak.

Investors’ sentiment continued to improve this week despite soaring prices of commodities. Price of gold made a new historical high this week as investors continue to hedge their risk against this previous commodity. Gold closed at the highest level at US$1436.10 an ounce in New York on Wednesday but pulled back on Thursday to close at 1,415.70 on profit taking. Price of crude oil in NYMEX also increased to 30 months high at 102.23 on Wednesday.

Inflation is the main concern here as commodities prices increase and for Malaysians, it also means higher subsidies. A recent UN report showed that food costs are at their highest level in 20 years. Most investors are thinking that the rising commodities prices may be temporary because of the Libya political crisis and interest rates may not be raised as the economy is still fragile. However, Bank Negara just recently mentioned that they are assessing the rising commodities prices, a sign that they are concerned about it. The Malaysian Ringgit has gained strength this week, quoted at 3.0255 against the greenback as compared to 3.0429 two weeks ago.

Technically, the market is still in a correction as the index stays between the key support and resistance levels between 1,470 and 1,540 points respectively. The short term 30-day moving average is still declining while the longer term 60 and 90 day moving averages are increasing. The FBMKLCI is now in-between these short to long term averages. The “weather” in the under a dark cloud according to the Ichimoku Cloud indicator and this indicates that the market sentiment is still generally bearish. We only expect to see the market coming out of the dark cloud once the index breaks above the key resistance level.

The momentum indicators have turn bullish from being bearish last week but are still dominated by the bears in the longer term. The Relative Strength Index (RSI), MACD and Momentum Oscillators have increased to their middle levels after staying below them for the past one month. The FBMKLCI rebounded off the bottom band of the Bollinger Bands and is now above the middle band. The bands have not expanded and this means that the market is trading within its average. There is no strength yet in last week’s rally.

From the above analyses, the performance in the market last week is basically a technical rebound. There are no clear fundamentals to support the current rally and in fact, it is counter-supportive because of the sharp rise in commodities prices. As for the local market, which is currently in a correction, the direction can only be determined once the benchmark index breaks the support or resistance levels.

Based on the rebound and short term momentum, the FBMKLCI is set to test the resistance level at 1,540 points. I am sure that there will be heavy resistance at this level. Failing to move above this level means that the market is still lacking confidence and we may expect continued sideway correction.

Daily KLCI chart as at 3 March 2011 using NextVIEW Advisor Professional