Brent Technical Points to a Bigger Run

As much as I love to see oil going down from its current level, the technical analysis generated from the daily chart isn’t pointing it downwards. This meant more pain at the pumps in the future for us which paying more than the highest we’ve ever paid price of RM 2.70. The subsidized price was RM 2.70 back then but Brent was trading around $125 per barrel back then.

I guess merely a $65 per barrel oil would already see us paying RM2.70 challenging the historical high for all consumers in Malaysia. It is worrying the fact that consumer price index would rise at such a rapid rate when crude prices rise significantly. A backup plan to cushion a rapid rise in oil price is not yet in place which might end up creating a major shock later.

Moreover, oil is a commodity and commodity prices would rally within a huge cycle as production of the physical commodity tends to lag for a bit before it corrects itself meeting the right demand. Demand spikes signaled through reported GDP growth rates by major economies like China, US or the European Union would play a major role pushing oil prices higher this year.

The phenomenon of oil rising past $80 a barrel might have a low probability but the probability of oil dropping to $25 wasn’t there as well just 3 years ago!

Technical Analysis

Going back to technical analysis for Brent Crude, the Brent price is currently consolidating along $55 and somewhat formed a clear resistance at $57. We think that this is forming an ascending triangle where it soon might break the resistance of $57 and possible rallying to $60 before it takes a break again.

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Coupling that with a low MACD nearing the upper midpoint of zero, it proves that it still has room to go higher towards the positive side. The consolidating Moving Averages are currently holding the prices tight at $56 creating a support and with proper strength exerted, it would climb higher soon.

Fundamental Analysis

Fundamentally, the market is in a bullish environment this year and the feel-good factor is there to stay. Grow is likely to come back when major economies like US starts pushing growth plans where this is also the reason why oil spiked earlier after Donald Trump came into office.

The global feel-good factor on the economy hasn’t been factored in yet since China is still registering lower GDP growth rates. But as soon as growth rates stabilizes for several quarters, we should see commodity markets start picking up for a second rally.

Conclusion

We can’t do much really unless you can long oil futures and I think derivatives such as warrants issued by investment banks could include Brent as an underlying for us to trade or hedge in the future.

In the meantime, stocks like SapuraKencana seems to be the primary response in KLCI when oil prices move. This meant that the only way for us to benefit from an oil price rise is buying SKPETRO. But this is fairly in accurate since SKPETRO isn’t an upstream oil and gas company. It relies on the spending done by major oil companies like Petronas to derive its revenue and earnings.

I believe that the risk of oil price going up is more dangerous than ever judging from the current state of the Malaysian economy…

A Year of OM Monthly

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In a blink of an eye, we have reached the end of 2016 and completed 12 issues of OM Monthly. Looking at the pictures that made it to the front page of our publication, it brought along a lot of bearish sentiment starting from a major drop at the beginning of the year. Malaysia alone had its fair share of ups and downs with ringgit being the biggest killer our of KL Composite Index.

Later on, the negativity followed with Brexit that should never happen somehow happened! Luckily, some Pokemon came to cheer up everyone when all things are down…

With recovering oil prices, it seems that all is well for the oil sector till some of these offshore oil companies having trouble paying its bond holders. How many more of these small cap oil companies are in similar danger? That directly affects the performance of our local banks which had a tough time recovering.

Finally, the inevitable Trump voted as President of The United States closed the chapter of “things that can’t happen, happened”. The US markets see the biggest gain this year and it might roll-over to 2017.

In the mean time, markets going quiet again and let us rest and enjoy the Santa Clause rally that would normally start next Friday 23rd December!

You can view the 12 issues of OM Monthly in the links below.

OM Monthly

Jan 2016 | Feb 2016 | Mar 2016 | Apr 2016 | May 2016 | Jun 2016

Jul 2016 | Aug 2016 | Sep 2016 | Oct 2016 | Nov 2016 | Dec 2016

 

 

This Sums Up What Happened Yesterday

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What a wild ride for the markets where it likely sits in the top 3 for the biggest daily swing in history.

Looking at how the markets moved, mainly it was shocked by the fear brewing when the results turn out differently from expectation. The expectation was simple, Clinton = good, Trump = not!

Since the “not” became president, then it is logical for markets to go on a sell-off signalling a negative outlook all together. But investors have to prepare to buy since a figure-head change in the US might change the economy as a whole. This is why we posted yesterday urging investors to use Brexit’s market movement as a reference to what will happen if Trump wins.

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Anyway, going back to the White House. For an approval to go through, the senate and house has to vote for it. The president has the veto power but if US wants to start deportation, the house has to vote for the law to go through. Evidently, markets begin to rebound sharply after it digest the fact that changing president might change policy but bad policies are unlikely to be passed.

Unlike George Bush’s plan to go to war with Iraq, America at that specific period of time are hurting after the 9-11 attacks. With brewing vengeance in the hearts of every American, the war started almost immediately with approval rating higher than ever.

In contrast to war versus the deportation and wall building ideas by Trump. It seems that it would face a hard time getting across the house. In his speech yesterday, he did not touch anything about immigration and walls. All he talked about is creating more jobs for the people. It seems though his craziness was kept away and his wildcard policies aren’t here to stay seemingly he isn’t the wildcard candidate any longer.

I guess business as usual for now with the likelihood of a Fed rate hike delaying once again since his policy pushes forward and creating growth that every American is looking for.

Foresee market to rise to end of this year with pressure on Janet Yellen whether to hike in December first and possibly lower the rate again when Trump comes into office officially. The tables have shifted and it we are now back looking at Fed’s action after we are done with politics.

 

Trump Wins… Now What?

We haven’t drafted our article yet on strategy leading to a change of president.

Base case here is to treat this shock in the markets similar to what happened during Brexit. Business would go on and if there’s a change, it would happen slowly over years or perhaps won’t happen at all.

For a new legislation to pass, it requires the senate’s approval and that’s a long process. We can expect that absurd action might not be taken by Trump as well unless the he could convince the whole senate for approval.

In the mean time, here’s an article from HSBC and their outlook on markets, equities and foreign exchange.

Enjoy!

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Citi – Car of the Future 3

The third article from Citi talking about cars of the future. This is a nice article where not only you learn what to invest in for the auto parts sector but enlightens you to your vehicle purchase as well.

Questions like “Do I need a plug-in hybrid?”. Cases where a sudden discount offered by auto sales agent might look like value to you but the truth being component or features are going obsolete in that particular vehicle might give you some heads up.

The car of the future shows you the direction where the auto sector is heading. Let it be simple bluetooth connectivity to complicated engines combustion types, these series would answer your curiosity well!

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Click for Article

Car of The Future v2.0

Car of The Future

 

Crash Course to Last Week’s Bursa Fibonacci Session

Last weekend, Bursa Marketplace organized a free event and the Fibo event attracted me since my Fibo skills are merely elementary and all I understood was ‘Fibo = a bunch of horizontal lines’.

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But indeed this was a great course for me to discover a new technical analysis method and I’ll try to share the important parts. As you can see this is a crash course we will do a simple intro and jump straight into applying via step 1, 2, 3, etc…

Let’s start!

Introduction

It was observed that many things in nature follow a natural sequence which can be represented by the the Fibonacci sequence. Things such as a formation of a spiral shell can be explained or the famous drawing by Leonardo Da Vinci on the proportion of the human body which follow a Fibonacci sequence.

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I’m not going to go into details on this buy you can visit this site for more info.

What’s important is these sequence.

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, ….

The sequence above isn’t some random number but its actually a sequence of where the first two number are summed up with a starting point of 0, 1,… The sum of 0 and 1 equals 1 followed by 1 and 1 which equals 2, 2 and 1 which equals 3 and so on…

So how do you translate these random numbers into the candlestick charts?

A week has 5 trading days.
A month has roughly 22 trading days.
A quarter has roughly 60 trading days
A year roughly has 250 trading days.

The number of trading days are close to the Fibo sequence of 5, 21, 55 and 233. Since that’s the case we can build our model of Simple Moving Average based on the Fibo sequence number forming SMA5, SMA21, SMA55 and SMA233.

Depending on which time frame you are looking at, you need to modify your SMA based on it. But today, we are more interested in medium term trading with daily candlesticks.

With daily candlesticks, we are more interested with SMA55 and SMA233 since quarterly reports alters a stock’s direction and the long term average of 1 year is suitable to gauge how the stock is performing.

Step 1: Generate a chart with SMA55 and SMA233

With that, we generate a chart similar to the one below.

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Step 2: Look for Crosses

Next is to look for Golden Cross or Death Cross within the chart after adding both SMA55 and SMA233.

Investopedia ‘Golden Cross’
The golden cross is a bullish breakout pattern formed from a crossover involving a security’s short-term moving average (in our case SMA55) breaking above its long-term moving average (SMA233) or resistance level. As long-term indicators carry more weight, the golden cross indicates a bull market on the horizon and is reinforced by high trading volumes.
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Investopedia ‘Death Cross’
A death cross is a crossover resulting from a security’s long-term moving average breaking above its short-term moving average or support level. It is so named due to the shape created when charting the activity and its association with a downward market trend. As long-term indicators carry more weight, this trend indicates a bear market on the horizon and is reinforced by high trading volumes. Additionally, the long-term moving average becomes the new resistance level in the rising market.
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Basically after a Golden Cross happens, you would want to do ‘BUY’ trades. Similarly after a Death Cross happens, you would want to do ‘SELL’ trades. Basically you wouldn’t want to be a hero trying to buy the lowest point as you are likely to get batched up rather than be lucky most of the time.

Going back to CIMB’s, a Golden Cross just happened and we already can determine that the BUY calls should already be coming in and active in your mind!

Step 3: Look for impulses and corrections

Generally, impulses looks something like in the picture below. The wave 1 up is an impulse while wave 2 down is a correction. The impulse and correction is only true when the range of wave 2 is less than wave 1.

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In the case for CIMB in our example, the Fibo horizontal lines can be drawn from the bottom very bottom of the 1st impulse to where it ends represented by the up arrow (start) to down arrow (end).

Note that the 1st impulse is determined by the 1st Golden Cross that occur. Meaning the Golden Cross that happened in mid-September already gave us the buy signal and our job is to find the 1st impulse which is usually the period of time before where the Golden Cross happens. Obviously we can’t determine where our retracement line drawn should stop until the first correction happens. In my opinion, I believe this is the limitation of this model and should never be used to fish the bottom.

From the chart below, I’ve determine my 1st correction as the price of CIMB from 4.86 to 4.57.

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With that, the Fibonacci retracement lines are drawn and you can see that it immediately hit the 5.04’s resistance on last week’s close. Those retracement lines on the chart are good reference points to buy or profit take depending on which trade you have or going to initiate.

At the point of writing, CIMB currently trades at 5.08 which meant that if the strength persist it would hit 5.15 in no time and 5.04 is had became the new support level. In this case, we can conclude that 4.7o is a good entry point when a correction happens.

What’s with the Average True Range indicator?

As you can see in the chart below, ATR was set at 60 periods (a quarter) and at the current moment the ATR recorded for CIMB stands at 0.085.

The number 0.085 meant that it is the average range that CIMB trades for the last 60 days.

ATR does not determine which end the market would breakout but when the day’s range exceeds the ATR number, it is likely that the follow day’s market would follow.

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So if you’re still holding to CIMB last Friday and in a dilemma either to take profit or hold on hoping to break the 5.04 resistance, you can refer to ATR. The ATR was around 0.085 and the day ended with CIMB gaining 0.11 which is more than ATR.

In this case, you can hold on since the probability for another run up is higher than to stop at that resistance level. It doesn’t confirm but based on calculated risk, the odds are on your side. Coming into today’s trading session, it seems to be correct that CIMB breached the 5.04 resistance and probably reaching the 5.15 resistance very soon.

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Summary of Steps

Step 1: Setup SMA55, SMA233

Step 2: Determine the Crosses

Step 3: Determine the impulse to draw the Fibo retracement lines

Step 4: Confirm trend using ATR (to break resistance/support or remains weak and retrace)

Step 5: Try to determine these before market closes as this is where the day’s candle begin to form and recorded

I did not talk about how the percentages are determined or how these numbers are sp strong to be used as reference. You should read why people use these numbers as it the series eventually end up in what they call a ‘Golden Ratio’

Visit here and read about Golden Ratio and why these numbers prove a point to be used as reference

 

Updated: HSBC Preview on Malaysia’s 2017 Budget

The HSBC report gave us the general view which is in-line with almost everyone’s expectation and there’s nothing to be surprised of.

As expected, the government revenue this year had stabilized with oil coming back from the $25 lows and the increase of economic activity creating more GST revenue for the government.

Also as expected, since 2017 can be an election year. The BR1M would likely increase to strengthen the coalition influence within the country.

One thing that is different in our view is how PM Najib would squeeze on spending in their view. We believe that a range of expenses would be launched since its election year to promote strength and growth within the current government. Instead of narrowing budget deficit, we guess the budget deficit would remain above 3% of GDP and tightening measure would come in place in 2018.

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The top three concern of citizen is still the hardest to address.

In our view, disappointingly there’s isn’t a way government could address them lowering the concern percentages since.

  1. Oil rebound higher fuel prices. Since we are on floating mechanism now.
  2. Lowering benchmark interest rate likely lead to higher inflation.
  3. Lowering benchmark interest rate likely see housing prices inflate again.
  4. Inflation rate > savings rate typically lowers the wealth of citizens.
  5. Lowering tax further isn’t going to guarantee improvement in consumption. The government isn’t likely to initiate it since it takes money out from their pocket without much benefit.

Sentiment hasn’t improve much at the current moment and that could be well represented with the performance of KLCI. Markets round the world started moving while Malaysia lags. The bottom might be visible but there isn’t any catalyst to move things up!

In short, infrastructure spending would continue and that is why the likelihood of a budget contraction wont happen. Continuous spending spree pays the best outcome at the current moment compared to the government tightening its belt.

That’s our view on the latest Budget 2017…

See the latest report from HSBC where it previews on Malaysia’s budget 2017.

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Click for Report