Well let’s start with the KLCI.

I’m going to split my comments into two categories here: 1 for short term traders and 1 for longer term traders.

For Short Term Traders

This baby gave us some turning signals before Chinese New Year which I wrote about here. At the time many of us were “ho-hum” about it because it wasn’t the first time that a reversal signal was given before the market resumed its uptrend. And after all at the end of the day it was just that. A signal. I myself took the opportunity to lighten my positions but I respect those who decided to hang on. But then yesterday we got a down day. You can see in the chart below it was a black candle. Also, this was supported by high volume. So we had a few days where a reversal signal was given, followed by a day the market lost about 50 points before (barely) recovering. This was what technical analysts calls the” confirmation”. If you’re a technical day trader, you must learn this golden sequence - “signal” and “confirmation”. Once this occurs you must liquidate any short term day trades. But I know a lot of people who went in by following the gap-up on 5 February which was a technical buy signal, saw the confirmation to sell, but then decided to hang on because they hadn’t made any money on that trade. I would advise beginners and intermediate traders not to do this because the buy signal has come and gone. A sell signal has now been generated. There is no longer any reason for you to be in the trade anymore. “Ah, but I will hold on for the longer term, because the market always goes up in the long run.” is the frequent response. Then let me ask you something: Are you a long term trader or a short term trader? Do you know that the majority of “long-term” positions are the result of failed short term trades? Therefore if you’re going to trade, stick to your plan and be consistent. Don’t switch tactics in the middle of a trade. This is bad planning and the main reason why people lose money in the market.

Okay what the did the market tell us today? Well, because of the sharks that went in this morning we got ourselves a nice little “hanging-man” candle on high volume. This means that the bulls were back today. If tomorrow ends higher than the close of today, the two candles will combine and be called a “morning star” which is a stronger reversal signal. The bulls beat the bears by recovering the losses on day 1 and then continuing to fight on day 2. If volumes stay where they are, then that’s an even stronger signal. However, note that if tomorrow is not an up day and it ends up down, then there will be no reversal signal, so short term traders should stay out of the market. My personal view is that the market will close up tomorrow because I do not believe for 1 minute that the bulls have given up. I don’t smell blood on the streets yet. Too many people still hold the belief that this is a “healthy correction”. So expect another attempt by the bulls to try to reclaim the 1300 crown soon.

Let’s gaze into the crystal ball a little further and try to imagine what is going to happen when the bulls try to recapture the market. Play a little mind game and imagine you can peer into the future - and in that future, about a week from now, market is at 1250 - 1300 again. What will you do with your position?

I imagine that some you who are not heavily loaded with positions now will want to buy some shares, but I am pretty certain that most of you with a lot of positions now will take the opportunity to lighten up and reduce your holdings to avoid another heart attack like you did today. Therefore, I expect 1250-1300 to encounter serious resistance (I have called this the “distribution zone” which is a level I know many will try to sell their positions and take the opportunity to get out).

All this talk about peering into the future nicely bring me onto the next section:

For Long Term Traders

There is a misconception out there that long term traders do not have to read up on or understand technical signals. This is a bad idea because not being able to recognise technical set ups means that you are not able to time your trades and more importantly you will not be able to determine the best weighting to give to all your assets in an efficient manner (i.e. percentage invested in any one company, percentage invested in cash, percentage invested in equities in total). In fact, you will be blindly averaging up or down, entering into trades based feelings, personal needs, feelings etc. After all a good understanding of macro-economics doesn’t exactly tell you when and what to buy exactly.

Therefore, I prefer to combine both technical setups and fundamentals to determine my trades. That to me is what a fully-informed, sophisticated investor should be. Firing on all cylinders. Someone who isn’t trying to outguess his market opponents by using only 1 side of his brain. (My mentor used to tell me: “Don’t bring a butter knife to a gunfight”.)

However, the types of signals which a long term trader should use depends less on daily price/volumes. They should be based on identifying important supports and resistances and determining when sentiment is weak or strong. The long term trader’s game is very simple. Buy into good companies when sentiment is weak, and sell when sentiment is strong. A typical setup involves identifying good companies first and foremost. This depends on one’s ability to successfully read a balance sheet and evaluate its prospects (luckily we show you how to do it on this blog via our company scorecard technique). Then, by using momentum or relative strength indicators over various timeframes, one can identify when a good company is truly getting whacked and a good candidate to buy. Note that unlike short term traders, long term traders do not require technical confirmations once they get their signals. This is because long terms traders do not believe that they can successfully identify market tops or bottoms, instead they are happy to go in near those levels. Therefore I have drawn up a weekly for the KLCI and included moving averages, trendlines, and a Relative Strength Indicator (you can use any momentum indicator here - they all tell you pretty much the same thing!) What I would ideally love is for the KLCI to venture back down to 950 - 1000 or the RSI indicator to go below 20 (if the market truly tanks several days for the next few days it will hit that level very quickly). As you can also see, 950 - 1000 offers serious support.

Anyway, if you’re a long term trader I would say that the signals haven’t even begun to tell you to buy yet. In fact, it’s still in oversold territory!

Conclusion

Regardless of whether my analysis is right or not, I sincerely hope that I have successfully demonstrated to you the train of thought which should be going through your mind as a trader in trying to understand what is going on. Notice that I have not relied on any news items, research reports or offered any economic views here (and I do have a lot of them!) and I haven’t made any predictions. I’m looking for setups that are objective, rational and devoid of emotion or opinion. And I sincerely hope you do the same.

Good Luck and remember to enjoy your trading!