Long term FKLI chart and how trend lines work

I remember mentioning in a previous post about a long term trend line near 1700.  Here it is.  This trendline signifies a breakout from the FKLI previous decade high.  As you can see we have gone lower than the trend line. 

Trend lines are usually set by people who have clout in the market.  Sometimes these trades by big players don't pan out and thus the big player has to re-evaluate his position and is praying for the market to come back to his original trend line so he can cut his remaining position at a positive number.

Trend lines are more like guides than hard fast market rules.  Sometimes the market does dip below the trend line, but buyers push the market up to its trend line and beyond.  Hopefully it turns out this way but of course it all depends.  The lower it dips below the trend line, the more of a failure that trend line is.  I would be extremely concerned if the market dipped near 1600.  That point is a lot further than the big player who pushed the market higher would want.

Don't erase your trend lines, KLCI outlook

I'm beginning to wonder if trendlines are some arbitrary pricing action manipulated by big players.  The reason being that a lot of trendlines that fail to materialize to a downtrend or uptrend are still valid after they've been proven invalid.  That's a mouthful.

A failed trend down in October for palm oil has simply just been flat out wrong.  Nevertheless, all that selling has seemed to be a large position as the seller who started that downtrend swiftly reversed his position at where the downtrend would be just yesterday.

It's as if the seller said...okay guys I know i'm wrong at this time but I've got a backup sellers behind me that should push the market down.  If it gets back to my area, i'm gonna take a load off.

Boy was that load big!

The FKLI pretty much lives and dies by the price of oil.  They simply get tons of money from the commodity and with Malaysia on a spending spree as well as oil at such a low price, the Ringgit is not so hot.



Fret not though, all is not lost!  We still have hope in the last remaining trend line at near 1710.  This breakout was inspired by infinite QE.  Of course the failed trend line at 1790 will be the resistance.  I won't be erasing the failed trendline just yet.

FCPO and FKLI/KLCI Technical Analysis update

The FKLI  is trying to test the long term trend line at 1790.  The next few months will be crucial.  If the market still breaks significantly lower, the uptrend will need some time to form again.

FCPO has started a new downtrend.  The support at RM2,193 was handily broken.  At the moment, it is not certain just how low FCPO will go, but by all accounts most palm oil producers will have a difficult future.

In a previous post I was speculating perhaps FCPO was forming a breakout by staying above the RM 2,040 mark.  That turned out to be totally wrong.  Instead RM 2,193 gave out like a rusty old car on a rainy morning.  And we are at RM 2,100.

Long term technical outlook for FKLI, and the stock market and updates to FCPO.

The FKLI is one of the more difficult charts to plot trend lines for and interpret, My interpretation is that the uptrend is still in tact, set back in 2011.  But is losing steam especially with the current short term up trend over the last few days  fizziling out.

Given the weakness in oil price, I believe Malaysia might not be as attractive an investment destination as it once was due to the country basing its budget on higher price oil.  With all those dividends from Petronas used to fund the budget federal, There could be a shortfall.

But, the country also gains on subsidy savings, so perhaps it's not so bad.  The weakness in the ringgit tends to lead me to think Malaysia will be hurting more from lower oil prices than subsidy savings though.

If we are to consider the FKLI as an uptrend market, yes, the uptrend is still in tact.  But I actually think that we might hit down towards the 1400-1600 area some time in the future.  We certainly have the catalyst with lower oil prices.  If the market is able to come down, the next test of the trend line near 1780 could be a massive failure.

The trendline at 1770 in October is running at an increasing rate of about 8 points per month for those wanting to predict where the trend line will run in the near future.

Short term Outlook

Palm oil did an about face to the downside, pretty much at the area which i mentioned last week, the July breakdown point.  The resistance zone just took the uptrend and smacked it on its head.  Support is at RM2,220



The FKLI looks to be ending the upward movement after 3-4 red days.  Usually uptrends have just one down day followed by reversals higher.  This uptrend looks dead.  When we zoom in on the micro trends, we have two areas, the lower box and the middle box as possible support points.

Zeti hints at higher interest rates, why this is significant

From the Business Times:

Bank Negara Malaysia said it may increase interest rates further to avert asset bubbles and discourage risky investments by people seeking better returns, even as inflation will likely remain "modest" this year.

"We will review the conditions at our next monetary policy meeting and work toward further normalising if necessary," governor Tan Sri Dr Zeti Akhtar Aziz said in a March 12 Bloomberg Television interview in Kuala Lumpur. "Inflation will continue to be modest and therefore it would not prompt us towards tightening, but that does not preclude that we will continue to normalise interest rates."

"Certainly the first half of the year, all the signs are pointing to stronger growth" as domestic demand and investment recover, she said.

Inflation of about 2 per cent would be considered "modest", Zeti said. Malaysia's consumer prices rose for a second month in January, climbing 1.3 per cent from a year earlier from an average 0.6 per cent in 2009.

Should price gains accelerate further to 3 per cent, for example, "we would begin looking at what are the sources of inflation because if it was demand-induced then" the central bank would look at "tightening" monetary policy, Zeti said.

Zeti refrained from raising interest rates in 2008 when consumer prices rose as much as 8.5 per cent in July and August amid soaring oil and commodity prices, saying inflation wasn't driven by higher demand and would ease as global growth slowed.

Malaysia's policy makers aren't "inflation targeters", she said last week.

While the rise in interest rates is not insanely surprising, given many other countries are currently tightening, the tone used in explaining the rationale of the interest rate moves point towards moving in a different direction that other central bank uber money printers.

For one, the bank has openly stated that it is not an inflation target-er, and is willing to repay back the savers who have been sitting patiently financing the Malaysian economy through this difficult time. This is excellent. This is a central bank that is willing to break from the crowd and not just follow inflation and economic data like a mindless lemming.

They are willing to raise interest rates and acknowledge savers which is fantastic given the ridiculous amount of money printing by everyone out there. Countries that have raised interest rates are doing so because of what inflation data tells them, following in the footsteps of the US; not because they want to compensate savers. While interest rate increases do give investors confidence, the knock on these central banks is that they will just as likely reverse actions if the data tells them to. Rarely is data ever stable especially given the current volatile economic conditions, so what currency investors crave is foresight on what a bank will do. Foresight that the bank will act accordingly to data is about as stable as an earthquake.

In a world where every central bank is hell bent tunneling in on economic growth, the Malaysian Central bank has taken a refreshing change in tone. This currency is going up, and the economy should be decent. If you want to break from the pack, Malaysia central bank is a prime example. Nothing says confidence like a country that is willing to acknowledge it will do something different from the money printing crowd and defend the savers and spending power of its currency, even if the economic recovery isn't as strong.

US Job Report suggests that Green shoots are mostly Yellow weeds

Some excerpts from RGE Monitor:

The June employment report suggests that the alleged ‘green shoots’ are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

The other element of the report that must be considered is that, for the summer, the Bureau of Labor Statistics (BLS) is still adding between 150,000 and 200,000 jobs based on the birth/death model. We know the distortions of the birth/death model – that in a recession jobs created within firms are much smaller than those created by firms that are dying. So that’s distorting downward the number of job losses. Based on the initial claims for unemployment benefits, it’s more likely that the job losses are closer to 600,000 per month rather than the figures officially reported.

The other important aspect of the labor market is that if the unemployment rate is going to peak around 11 percent next year, the expected losses for banks on their loans and securities are going to be much higher than the ones estimated in the recent stress tests. You plug an unemployment rate of 11 percent in any model of loan losses and recovery rates and you get very ugly losses for subprime, near-prime, prime, home equity loan lines, credit cards, auto loans, student loans, leverage loans, and commercial loans – much bigger numbers than what the stress tests projected.

There are also signs that there may be forces leading to a double-dip recession, sometime toward the second half of next year or towards 2011. If oil prices rise too much, too fast, too soon, that’s going to have a negative effect on trade and real disposable income in oil-importing countries (US, Europe, Japan, China, etc.). Also concerns about unsustainable budget deficits are high and are going to remain high, with growth anemic and unemployment rising. These deficits are already pushing long-term interest rates higher as investors worry about medium- to long-term stability. If these budget deficits are going to continue to be monetized, eventually, toward the end of next year, you are going to have a sharp increase in expected inflation - after three years of deflationary pressures - that’s going to push interest rates even higher.

For the time being, of course, there are massive deflationary pressures in the economy: the slack in the goods markets, with demand falling relative to supply-and-excess capacity. The rising slack in labor markets, which are controlling wages and labor costs and pushing them down, implies that deflationary pressures are going to be dominant this year and next year.

But eventually, large budget deficits and their monetization are going to lead – towards the end of next year and in 2011 – to an increase in expected inflation that may lead to a further increase in ten-year treasuries and other long-term government bond yields, and thus mortgage and private-market rates. Together with higher oil prices driven up in part by this wall of liquidity rather than fundamentals alone, this could be a double whammy that could push the economy into a double-dip or W-shaped recession by late 2010 or 2011. So the outlook for the US and global economy remains extremely weak ahead. The recent rally in global equities, commodities and credit may soon fizzle out as an onslaught of worse- than-expected macro, earnings and financial news take a toll on this rally, which has gotten way ahead of improvement in actual macro data.

I pulled some interesting sections from RGE Monitor's article by Nouriel Roubini regarding the current US job numbers.

Last month's job losses were quite decent at 360k compared to the trend of 500k job losses a month. But this blip might be explained by the distortions caused by the birth/death model that the BLS is recently employing. Adjust 360k by 150-200k jobs a month, we are back at 500k job losses a month, about where the trend currently is.

Higher unemployment has a huge effect on the stress tests., so bank losses will get larger. Analysts using the stress test results for their earnings projection will need to adjust for higher unemployment.

Deflationary pressures will be around for this year and next, adding on to the idea that the recent commodity rally looks like a head fake.

And this "W" shaped recovery a lot of economists are talking about seems more like a recovery with ups and downs instead of a double bottom. The recovery will be weak, recessions will now be weak, basically, a stagnant economy. Inflation might rise further into the future.

Why commodities will do well over a longer horizon (but not now).

Currently, China has been buying up lots of commodities. I believe they think that commodities is one of the most important investments they can make. But likely most of the purchases at this point is speculative and probably unneeded unless they are willing to let the supplies sit their for years.

The major reason commodities will do well over a longer period of 5+ years is mainly because nothing has really changed. China will continue to dump exports and piggy back on the the US and other developed nation's economies. They will find it harder to do so as time goes on as they will have to manage their currencies with other developing nations besides the US.

As you can tell, this is not a really healthy or effecient way of running an economy. By force feeding products to developing nations, we have a problem. The other economies don't really need the exports. By making exports cheaper than they are supposed to be through currency manipulation, quantity of products supplied to the world grossly exceeds what is effecient.

But alas, nothing is perfect. If nations can't play fair with each other, it will show with commodity prices. To keep this oversupply of products gravy train going requires an equally sizable oversupply of commodities. So this is a nice gutcheck against those countries who piggy back through export oriented economies.

The export model has taken a gut check, but there are no indications that countries will change their growth through exports philosophy so the picture for commodities is still strong. Also contritbuting to this is monetary abuses by nations. So once the monetary abuses abate or the world has an oversupply of commodities, we will probably see the commodity prices come back down.

The other way the commodity picture might turn bad is for world nations to start paying down debt. Most nations, though aren't doing the right thing as all they can think about is spending their way out of a recession. Most countries' leadership lack the mettle to take the tough medicine and would rather put it off for later. As long as we have this, the outlook for commodities looks good.