Dow - Sub-wave 3 about to start

In this option of wave count, Dow has completed its first uptrend wave (I) that started in March. Since middle of June Dow has started its corrective major wave (II), so far it has completed 5 mini down waves i-ii-iii-iv-v to form sub-wave 1 followed by 3 mini waves up to form sub-wave 2. If Dow starts to turn south from here, that will signal the starting of the downtrend sub-wave 3. Hold cash.

A(H1N1) or Swine Flu

On 27 June, Health Minister Datuk Seri Liow Tiong Lai advised RTM to use the term Influenza A(H1N1) instead of Swine Flu (Selsema Babi) to comply with WHO's directive to make sure that every country will use the same terminology.

Information, Communication and Culture Minister Datuk Seri Dr Rais Yatim has suggested earlier to the media to use the term 'Selsema Babi' instead of Influenza A(H1N1) to ensure that (a) the public was aware of the danger of the flu, (b) Massage could be conveyed more accurately and (c) Easier for the news broadcaster to read 'Selsema Babi' than Influenza A(H1N1). Malaysia betul betul boleh. Rais Yatim looked really serious, don't play play. MCA man is forever smiling, Hakuna Matata, it means no worries for the rest of your days, hakuna matata, MCA, hakuna matata.

KLCI - Sub-wave 3 about to start

On last Friday and today KLCI formed two candlesticks that looked like 'hanging man' but with a short lower shadow as shown in the enlarged version as shown below. 'Hanging man' signals that selling pressure has started to increase.
For two days the market opened high followed by sellers that pushed the prices lower during the session and at the close the prices were being pushed higher. 'Hanging man' needs confirmation for reversal in the form of either a long red candle or a red candle with a gap. Either one of these two candles will confirm the starting of the sub-wave 3 down south.

However there is still a possibility that KLCI may move up a few more points to form a small i-ii-iii waves for the sub-wave 2 before it started to go south as shown below.

First sign of downtrend - Dow Theory

Dow Theory defines market trend in a simple way: uptrend is formed by a series of rising peaks and rising troughs ( higher highs and higher lows ). Downtrend is the reverse, it is formed by a series of declining highs and declining troughs ( lower highs and lower lows).

Dow has broken the lower trend line of the uptrend channel as shown above and it has set a high that is lower that the previous high and a low lower than its previous low. Downtrend has started.

Nasdaq has remained within the uptrend channel but it has started to form lower high and lower low.

S&P is similar to Dow. Let's see whether there are more lower highs and lower lows from now on and whether Dow is going to form the "inverted head and shoulders" as shown below. That can be an excellent entry point.

Pictures worth more than a thousand words

At website http://www.voxeu.org/ there is an interesting article "A Tale of Two Depressions" by Professor Barry Eichengreen, University of California, Berkeley and Professor Kevin H. O'Rourke, Trinity College, Dublin, there are some interesting charts in the article (reproduced below) that tracked the current economics performance with respect to that of the 1929 Great Depression.

To match the 1929 and the current statistical charts, the Professors dated the beginning of the Current global recession to April 2008 and that of 1929 Great Depression to June 1929.

The rate at which the global industrial output declined, it matched that of the Great Depression closely until June 2009. In the next 24 months if the decline follows a similar path, the current stock market rebound is definitely a bear market rebound.

Volume of world trade is shrinking at a more alarming rate than that during the first 12 months of the 1929 Great Depression.

The decline in global stock markets to date was worse than the first 12 months of the Great Depression. Are the current global markets going to hit the bottom within the next 12 months since it is moving down at a faster pace?

The comment by the two authors was : "Globally we are tracking or doing even worse than the Great Depression". A very bearish comment to the global economy.

The positive things in the current crisis are the way the governments pumped in money and lowered the interest rate. During the Great Depression, money supply collapsed and the interest rate has never gone below 3% as shown above. The average central banks discount rate is less than 1% currently. The fiscal policy of the governments is far more aggressive this time. During the Great Depression, the weighted average fiscal deficit for 24 leading economic powers was smaller than 4% of gross domestic product. In the current crisis US is heading for a fiscal deficit of 14% of the GDP.


I noticed the inconsistency in date assigned by the authors to the beginning of the global recessions. For the Great Depression the date assigned was June 1929, which is two months ahead of the August 1929 stock market peak whereas date assigned for the current recession at April 2008 is six months behind the stock market peak on October 2007. Maybe I should compare the dates with an average global stock market peak instead of DOW's peak. If based strictly on statistic, the economy in 1929 started to decline two months ahead of the stock market decline whereas in 2007/2008 the economy strarted to shrink 6 months after the stock market decline, so the saying that the stock market is 6 months ahead of the economy can be quite true.

KLCI sub-wave 2 provides good exit point

Assuming the last peak is the end of major (III), the last 7 days pullback is either sub-wave i or 1 of wave A of (III), it is more likely to be sub-wave 1, there is still a long way to go. After the completion of sub-wave 1 the next sub-wave 2 rebound provides good opportunity to get rid off whatever balance of stocks in hand before the next sub-wave 3 drop that can go to either 1000 or 960 (1.618 of sub-wave 1) for a temporary pause in this minimum one month consolidation. Advisable to hold cash.

Sub-wave iii of major wave (II) has started

Dow came down 2.3% and Nasdaq came down 3.3% at the close of Monday trading. Last Friday 'Doji' candlesticks for both the indices marked the end of sub-wave ii as shown above. My expectation of another one or two more days of up for sub-wave ii was short-circuited by the announcement by World Bank that the grobal economy will shrink by an estimated 2.9% in 2009. Sub-wave iii has started, most likely it will stop at 8200 for a sub-wave iv rebound. As mentioned in my previous post, if Dow is going for an 'inverted head and shoulders' formation as shown in my previous post, this major wave (II) will have to reach somewhere near 7400.

Bigger pullback next week

I still maintained that the option where Dow has just completed the major wave (I) is of a higher possibility. Based on this option, last week Dow has completed its sub-wave i of its major wave (II), I am expecting a rebound (one or two days) to complete sub-wave ii follows by a sharp sub-wave iii pullback to 8000 and below
If Dow is going for an "inverted head and shoulders" formation as shown below, wave (II) pullback can go to 7400 and below.


Hang Seng is one wave ahead of Dow. The March - June advance is its major wave (III). Last week it has completed its sub-wave i of wave (IV). It will follow Dow with a small rebound for one or two days to complete sub-wave ii follows by a sharp sub-wave iii pullback.

STI has been following the DOW very closely. Next week movement will be the same as Dow.

KL composite index's wave count is similar to Hang Seng. The March to June run-up consists of 9 waves as shown. Similarly I am expecting another one to two days rebound before the sharp sub-wave iii takes place. Last chance for me to sell whatever balance of stocks I have. Keep cash is the advice.

Gated Sevices - Big Business

Last year when YB Hannah Yeoh was actively promoting the 'SJ Alert' asking all Subang Jaya residents to participate in this campaign to fight crime, I sent a massage to her blog saying that she should spent more time with the police and should run after the police in this issue of crime fighting instead of spending so much time in 'SJ Alert'. The reaction was fantastic.


I was under heavy missile attack from Subang Jaya for pouring cold water.

My reply to the missiles was "If you have a maid at home and when your maid is not doing her job, instead of taking necessary action to make sure that she does her works, you start a 'home alert' and try to mobilize your husband, your parents and your children to make sure that your house is clean, laundry is done, food is served while your maid is shaking her legs watching TV. Can you say "Thanks to the 'home alert', your house is in order." I was expecting more missiles but surprisingly there was no reaction at all to my reply. It is possible that they have decided to ignore me.

My area has 920 households, the resident association has proposed to start a gated and guarded project for the 920 households. The proposed fee is Rm 50.00 a month per household. For 100% participation this is a Rm 552,000.00 annual business. I started to think, since PJ and Subang have a combined population of about one million, by assuming 6 person per household, that is 166,000 households. If these households were to have gated and guarded projects, it is a Rm 100 million a year business. If any one can make sure that the current police inefficiency is maintained, the crime rate in the housing area remains high and the resident association support the idea, he can start to have his Rm100 million a year business. Call this a conspiracy theory.

Pre-dawn robbing spree

Seven robbers with parang terrorised 7 shops within an hour in Puchong on Tuesday morning.

Selangor Police Chief Datuk Khalid Abu Bakar

It was reported that our police chief was very angry."Don't challenge us or risk paying the price," said Datuk Khalid. From what he has said, I don't think he was that angry. The sentance looked more like a warning rather than a statement of an all out commitment to catch these 7 robbers. "we will step up petrols....." I am very sad that it needs a crime of this magnitude to get these words "we will step up petrols..." from the police. I hope they really step up petrols not just talk talk only.

When Lee Kuan Yew described JB as a cowboy town many years ago, both the politician and police were angry and considered that as an insult. Why? Because JB is actually not a cowboy town, it is the wild wild west and its boundary has extended from JB to the Klang valley and it is still extending judging from the increasing number of legal and illegal gated housing estates. To me this is worst that the AH1N1 that government is talking about everyday. AH1N1 has not kill anyone in this country so far but the snatch thief and mat rempit have injured and killed many. Be careful and take your weapon with you when you have to walk alone especially at night, you must know how to protect yourself when the police can not protect you.

Major World Indices

How the world major indices looked at this early stage of major wave (II) consolidation?
US indices in general has not gone below the lower trend line at this moment. Theoritically these indices still remained in the uptrend channel. I am expecting a slight rebound before the indices breaking the lower trend line.

European market indices are rather bearish at this moment. All the three major indices as shown below has broken the lower trend line.

Some major Asian market indices have broken the lower trend line such as Hang Seng and STI, but the rest have remained within the channel. Most bearish is the Korean KOPSI which is about to form a downtrend channel, all it needs is another low that is lower then its previous low.

European markets are taking a lead in the Wave (II) correction. I expect the US indices to break their respective lower trendline soon with or without a minor rebound. Once the Dow breaks the lower trendline, all the rest of the indices will follow. Keep cash and wait for the last train to ride the wave (III).

The long awaited consolidation has started

Hang Seng dropped 391 points on Monday and another 333 points on Tuesday for a total 3.8% drop. Singapore STI dropped a similar 4% over two days. Dow has its confirmation 187 points drop on Monday after many Dojis and a shooting star. When these 3 markets can not perform and have decided to move south, KL Composite Index by itself can not run in an opposite direction. I think the uptrend since March 2009 has ended. For Dow as shown below, major wave (I) has ended and major wave (II) has started. Usually the initial phase of Wave (II) can appear to be quite harmless until the sub-wave iii stage, the downtrend will accelerate and will cause panic selling.

The most optimistic wave count is as shown above. Major wave (II) may pull back to around 7500 over a few weeks before the starting of wave (III) run-up. The most pessimistic is the unlikely count of waves (I)-(II)-(III) as shown below. It marks the completion of major wave B rebound. This is unlikely because both duration and magnitude are too short to be B wave when A wave lasted 17 months. But in stock, anything can happen.


At this stage it is advisable to hold cash rather than stocks.

Next Few Days May Witness Turning Point

In the next few days if Dow, Hang Seng, Singapore STI and Shanghai SSE do not have extension waves and if they are unable to break new ground, as shown in the following charts, the major uptrend wave since March 2009 might have ended. The next down wave will provide good entry points for those that have missed the March run-up.

A red candlestick of 150 points or more after last Friday Doji will confirm the turning point.
Shanghai SSE has formed a red candlestick last Friday. Is SSE the leader in heading south?

For Hang Seng and Singapore STI, a red candlestick after last Friday Dojis will be sufficient to confirm the respective turning point.