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ECONOMICS & STRATEGY
(for the week of 22-26 June 1998)



The Short-term Scenario

Last week, the market sell off was devastating and continuous. But it rebounded by the end of the week to close at 467.61, just five points lower than the previous week's close. During the week, the market closed on Tuesday at a record 8-year low at 435 pts. The reasons for the meltdown were focused yet again on the yen's renewed weakness, which is seen as a proxy for South East Asia's beleaguered currencies. This weakness is now threatening the US and the rest of the world's economic growth. Thus, when the yen rebounded strongly during the middle of the week due to US treasury and Japan's central bank intervention, the equity markets rallied accordingly.

Most of the classical technical indicators came off its lows towards the end of the week, which may suggest more consolidation this week. Daily and weekly momentum are still negative while the daily MACD signal line is turning up, implying a week of consolidation between 445 and 480. The weekly MACD is still pointing straight down. The mid-week rebound has brought the RSI to above-30, but still below a resistance line. The price pattern fell below the channel support, but rallied back to close above it. The presence of some buying support near 460 last Friday and the fact that half the gap was filled at this level, is indicative of a renewed attempt at 485. If the KLCI fills the gap to 450, we have to reckon with a renewed thrust to the downside. However, candlestick chart reading suggests a possible reversal for the next few weeks.

Wave-wise, the intermediate support level at 455/460 had been taken out, although it closed the week above these levels. These target levels were arrived at from price levels originating from 742, 681 and the most recent high at 596. It is imperative that the market closes higher this week, (i.e. above 512), for a confirmation of an intermediate counter rally. The next major support levels are at 415 and 385. The yen's movement this week holds the key to the short-term market direction.

The Long-term Scenarios

It is now more than a year since the dramatic collapse of the KLSE. The regional turmoil that began with the devaluation of the Thai Baht in July 1997 is still festering, and the question on everyone's mind is "When is this going to end?" In fact, the recent weakening of the yen has triggered another round of volatility in the Asian markets. The biggest danger now in the Asian economies is a devaluation of the Chinese yuan and consequently, a break of the Hongkong dollar peg to the US dollar. Whichever angle one looks from, Asia will have to brace itself for a sharp economic slowdown over the next 2-3 years. According to a senior World Bank official, the key is Japan, whose economy is now officially in recession. What Japan does over the next few months to resuscitate its economy could determine the fate of its Asian neighbours into the millennium.

Wave Analysis: Elliot Wave analysis is one of the best tools for forecasting long term trends from a technical angle. The methodology is very mathematical and time-consuming, but is based on a time-tested technique that can be uncannily accurate. The big multi-year picture of the KLSE points to a major bullish cycle that started in the late 70s/early 80 and ended in Feb 1997. The subsequent collapse is the start of a multi-year bear market to correct the excesses of the previous bull market. A major multi-year correction is now under way and is assumed to take the form of a major downcycle.

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