KLCI Taking A Breather

US market continued to fall on Friday with the Dow Industrial Average closing down 90 over points at the close. The drop was not as bad as initially thought and it is not as drastic as the drop we saw in China’s market. However, the negative momentum will set a negative tone on next week’s trading.

The KLCI has dropped for the past 2 trading session and the index looks set to test it’s 50 day moving average.

MACD is beginning to turn bearish with the indicator below its signal line. –DI is about to go above +DI which implies that the current up trend is likely to take a break.

Judging from the technical charts, the index is likely to drop below its 50 day moving average. The question then will be whether there is going to be a change in trend or just a pause in the rally.

2B Breakout System

The 2 bar breakout system is designed to capture short term trends by going long or short depending on the pattern formed by the 2 most recent price bars. The essence of this method is to look for reversal of the immediate directional momentum.

The rules of this method are:

Long trades

Enter:
1. Today’s low is less than the previous day low
2. Today’s high is less than the previous day high
3. Today’s close is less than the open
4. Go long at the next trading bar if the price goes above today’s high + 1 tick

Exit:
1. Use a trailing stop at previous day’s low

Short trades

Enter:
1. Today’s low is greater than the previous day low
2. Today’s high is greater than the previous day high
3. Today’s close is greater than the open
4. Go short at the next trading bar if the price goes below today’s low - 1 tick

Exit:
1. Use a trailing stop at previous day’s high

To see this method in action, let’s try it out on AUDUSD currency pair.

For long trades, the trading record is as such:

This method generates 23 trading signals from May 2009 till Oct 2010. Of the 23 trades, 14 were profitable (not considering transaction cost). That gives a winning probability of 60.87%.

Coastal Contracts Bhd - Moving Up

Commodities have a bright future given the fact that further quantitative easing in US will ultimately lead to inflation. This means that there is further catalyst in the pipeline for commodity price to move up.

Companies like Coastal Contracts Bhd looks set to benefit from the commodity up tick. The stock price has been moving in a consolidation range and is now close to the RM2.40 resistance level. ADX is beginning to move up and this coincides with the gain in momentum.

MACD indicator has moved above its signal line and stochastic chart is still in bullish territory. I will look to buy the counter if it manages to break the RM2.40 resistance level. Support is at RM2.20 level.