Wall Street started the trading week on a downward note, with talks of a Portugal bailout sending equities lower across the board. Gold managed to post a small gain for the session alongside a weaker dollar but the yellow metal is still struggling to regain lost ground following its sharp sell-off last week. Meanwhile, other commodities were also active as crude oil jumped 1.5% after news of a rupture in the Trans-Alaska pipeline made headlines over the weekend and remained almost entirely shut off on Monday. So far in 2011, equities have struggled to move much this year, and growing concerns in the euro-zone seem to be putting pressure on investor sentiment, which has been translated into range-bound trading for major indexes. Luckily Europe can’t steal all the headlines this week, with a round of corporate earnings hitting the wire all throughout the week, investors will be kept busy as earnings season gets underway.
Lackluster performance has been a global theme in these first few week of 2011, and the Indonesian equity market is no exception. Market Vectors Indonesia (IDX), which provides exposure to publicly traded companies that are domiciled and primarily listed in Indonesia, or that generate at least 50% of their revenues in Indonesia, was a star performer last year, returning over 40% in 2010 [see Top Ten Equity ETFs of 2010]. However, IDX has been struggling to march higher since about the middle of November in 2010, after it set an all time high of $93.14 per share on November 9th. In the past 4 weeks of trading, IDX has shed a little over 10%, bringing the fund all the way down near the $80 level [see IDX Fundamentals].
Below is a chart of IDX, spanning from launch until yesterday, and the plotted blue line is the 200-day simple moving average. The 200-day simple moving average is followed by many active traders and investors, and its purpose is to refine price movements over a longer period of time in order to assist with trend following and serve as a predictor for key price levels. Over the long run, the 200 day moving average is a fairly accurate predictor of direction as well as support/resistance levels. Simple observations across many securities show that the 200-day moving average acts as a viable support level in uptrends, as well as a resistance level in downtrends.
When we take a look at IDX’s chart above, it becomes apparent that the fund has touched the 200-day simple moving average only once before in its brief trading history. Zooming in, we can see that in May of 2010, IDX briefly traded below its 200-day moving average in the beginning of the month and towards the end as well. Furthermore, its evident that once IDX was able to close above the blue-line, it managed to resume its strong uptrend. Given that its 200-day average is still trending upward, coupled with a recent and severe sell-off, IDX should be on the radar screens for many traders and investors. Watch for IDX to further decline as it nears its 200-day moving average at around $79.44, especially if emerging market fears persist in the coming days.
Investors interested in establishing a long position should be patient and wait to see how the fund reacts as it near the pivotal 200-day moving average. It’s quite possible for IDX to bounce off the blue-line and continue its surge upward like nothing ever changed. However, its important to notice that following its peak in November, IDX has since then had three failed attempts at holding above $90 a share. In fact, following each of the three attempts after the peak, IDX managed to set lower-lows each time, which ought be treated as a caution sign. Furthermore, fears of inflation seem to be arising in much of the Asia Pacific region, which is putting additional pressure on investor sentiment, as made evident by the recent sell-offs across emerging markets, including a 5% loss for IDX in yesterday’s session which makes today such a crucial period for the in-focus region.
Investors are advised to exercise caution when trading, especially when using technical analysis. In addition to being conservative with your strategy, remember the importance of using stop-loss orders and observing disciplined profit taking techniques [also read Fibonacci Explained With CORN.]
Disclosure: No positions at time of writing.