As I mentioned in my last post, KLSE has hit resistance. This was characterised by a spike up in the early morning session followed by profit taking for the rest of the day. This means that Thursday’s price action emboldened many investors who put in their orders after market close which were filled in the morning, only to get whacked down by a second type of trader who decided to take their profits again.

If you look at the volumes for the past few days you will see that they are relatively low compared to last week. This means that there are still a lot of punters sitting on the fence. If you read the technical analyst reports in the papers, many of them are adopting a wait-and-see attitude, with the bullish ones actually advising a hold strategy. In fact it’s almost impossible not to at this stage and I would bet that a lot of people are trying to lighten their positions to 50-50 equity cash ratio so that they can invest again if the market goes lower but still have some holdings if the market goes up. I think that this is going to result in some resistance in the near future, which is why I am personally happy to be at 70-30 at the moment (cash-equity).

But the important question is: If this is what Mr Market is thinking how am I going to best position myself? Without a doubt this is an extended rally, so I would be looking for any signs of strength to sell into so that I can have money to buy shares again at a later, weaker moment. However, if the KLSE’s previous high is broken on high volume then I may add to short term positions because I think that will cause the majority of traders to think that the worst is over and that the uptrend is still continuing. But if that were to happen, I think that the smart money will sell again and whack everyone down once more (that is why I am only advocating short term long positions). Because remember that in bear markets, it is still possible to find short term powerful bull retracements which sometimes precede previous highs (this is called a fakeout). Be on the lookout for these, which can be identified by telltale low volumes.