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Saturday, June 21, 2008

Don't Blame the Dow!

Towards the end of last year when the US sub-prime crisis went from bad to critical, it was quite popular locally to talk about "financial disintermediation" (?) between the KLSE and the NYSE. It is a financially-big word - the general impression is that the writer claims that the US economy should have progressively diminishing effect on the KLSE, whereas China and other Asian markets will have progressively greater influence for the simple reason that the writer expects Malaysia's international trades to reflect the above similarly.

Whilst it sounds persuasive, many of the local traders and funds still look at the US markets every morning for guidance, as well as the Dow Jones Futures every evening in deciding whether to hold a position overnight or not. So, is it prudent to accept the view that US markets don't matter?

And despite the above, traders who look at US markets usually focus on the Dow, especially the DJ Futures. There is some debate whether the Dow or the S&P500 better represents the US markets. But if in doubt, why not look at both?

Anyway, the fact that there are many Dow followers means that after last night's performance, some of them will probably be worried now. Why? Well, the Dow has been on a downtrend since August last year, and the latest fall on Friday appears to have broke-out below an important longer term uptrend line. You can see how on the right edge of the chart below, the Dow closed lower than the uptrend line drawn.

Fortunately, or unfortunately, Technical Analysis is not a precise science. Even when one draws uptrend lines, there are usually many ways to draw the uptrend line. If one goes beyond the last 3 years, one can draw other types of uptrend lines that shows that Friday's closing is either broken or unbroken. But interestingly, the majority of the uptrend lines apprears to have been broken. And the general principle is that when these uptrend lines are broken, it is a generally bearish signal since an important market psychology has changed. The strength of the signal depends on many other technical factors, and even amongst trend-line breakouts, it also depends on factors such as the length of the uptrend line (longer trend lines are generally more significant), number of points touched (the more points touched, the more significant the trend line is and the violations), the slope and angle of the uptrend line, etc. Yet, at the end of the day, all of them are merely probability signals rather than points to certainty (even if they have varying degrees of probabilities).

Further complicating the signals is that if one applies the same technique to the S&P500, the uptrend line over the same period is generally not yet violated. Further, for NASDAQ and Russell2000, the fall is even relatively smaller, suggesting that the "fear" appears to be concentrated more on the Dow than the wider US markets.

So, if one wants to panic this coming Monday morning, my advise is to be panic for the right reasons, and don't just blame it on the Dow! (smile)

For example, markets in US and Asia are generally weak (think China, Vietnam), so, it is unfair to just blame the Dow.

Also, the local political developments has gone from ugly to uglier, especially with SAPP and Opposition parties attempting to call for a Vote of No Confidence against the PM on Monday June 23, although the general belief is that not only is the date impractical, the result likely to be unsuccessful and the PM is likely to retain his leadership post.

However, despite some thinking that last week's fall was "knee-jerk"(?) in reaction (since if AAB is likely to retain his post, then, a temporary fall is often seen as opportunities to buy), I think the Market didn't expect RPK to drop another bombshell this weekend, which lends credence to the often quote phrase "there's usually more than just one cockroach".

Since RPK's weekend bombshell
claims to involve personalities like Rosmah, Najib, Abdullah and Khairy, and touches on a complex web of issues with popular conspiracy theories such as the Judiciary, the ACA, the Media, the blisters, the lies, etc. this is likely to create further uncertainties and uneaseness amongst KLSE investors and players in general. Again, in itself you cannot really fault some writers to declare that this too is another "knee-jerk" reaction comes this Monday.

So, remember. If the market tanks on Monday, don't just blame it on the Dow. (smile)

Happy knee-jerking, Happy bottom fishing, Happy blaiming, Happy standing on the sidelines, Happy watching, Happy eating kuacis, etc.

Bottom Line = Don't Worry, Be Happy (smile). And always keep your losses small.

Disclaimer: The
writer does not encourage bottom fishing. The writer also does not encourage blaiming others. If you want to blame, look at yourself first, but be gentle on yourself too since you are just human. As usual, bottom fish or buy/hold/sell at your own risk. And don't forget to share the kuacis too. :-)


Shadi said...

nice post :)
if you like to get technical analysis for all nasdaq stocks, check in here:

Moola said...


The Wanderer had highlighted Dr.Brett's posting: http://traderfeed.blogspot.com/2008/06/worldwide-bear-market.html

Now that's reality.