STOCK EXCHANGE TECHNICAL ANALYSIS WARNING TO THE POLITICAL ELITE

Introductory note:
"This article has been published in the Moneter Indonesia economic daily, June 14, 2000 when the JSX index was reported to be 476 and it was to be seen if it was in the process to form the fifth wave to reinforce the strong downtrend.
A succeeding letter of June 20 to the same daily contained the comment that the index at 490 was approaching the resistance line, hoping to make a breakthrough soon, especially presuming a politically interference free cabinet formation. Interestingly it did the next day at 494.5, but the letter was published on June 24 while the JSX was already on a sideways move. As at least seven waves have been formed since then, moving away from the previous resistance line, this provides ample confirmation that a breakaway point has occurred and the suicidal course has certainly been changed to a survival direction.
Now August 25, 2000, the public is making a lot of noise about "panic selling at the stock exchange" because the index has dropped 4.1%, but does not pay attention to the technical analysis message that this year's political crisis has produced worse declines: January 19 - 4.3%, April 17 - 4.9% and May 29 - 4.29%. Therefore chartists don't join the panicking crowd because the trend clearly shows a sideways move, indicating that the political crisis has passed at least for the year 2000."

The economic society is straining every nerve in the effort to try prying into the outcome of the reformation process first year's ending. Economics seems to being extra hard pressed by politics making its pungent effects being felt increasingly stronger, perceived to be deviating from normal proportions as expected from ordinary governmental activities. Naturally the writer of this article is not in a position to comment on political aspects, but their powerful impact at national and even international level would finally pierce into the fibres of all levels of society. A measuring stick of such impact can be found in one of the significant economic indicators in a modern society, being the composite stock price index, as published here by the Jakarta Stock Exchange.
The warning as sounded in this article does not come from the writer of this article, being merely a chartist trying to find out what the stock exchange charts are saying, so it is a signal from the JSX composite index itself.

This article is based on the premise or concept of technical analysis, that anything contemplated by each participant of an exchange (stock as well as commoditiy) as a reason for buy-sell decisions, will have a collective or aggregate influence on the price level being a reflection of the interaction beween total bids and offers. Such considerations or factors are recognized as fundamental elements and have therefore entered the exchange beforehand and have been discounted in the price and volume as the aggregate end results.
Those trading the stock exchange basically consist of two categories: investors and speculators, and none of them will be able to avoid the prevailing technical influence, when making their next move. The first mentioned category are long term minded, hoping to make their profits from two sources, dividend payments and capital gains as the result of price increases. Because dividends are paid semi annually, investors are likely to hang on their stocks for a minimum period of six months also. Price increases should properly be caused by the stock issuers' improved financial performance, but can also be the result of other factors like dropping bank interest rates, a more favorable political atmosphere, a higher level of environmental safety, etc. Hence the investor would be more fundamentally oriented and has a lot of home work to do, much more than merely watch price and volume developments.
The speculator category is mainly interested in returns caused by capital gains resulting from rising stock prices, additionally when short-selling is allowed (sale of stock not owned, but to be bought within a certain time limit), price drops can also produce positivie returns. Because the speculator does not intend to hold his or her stock for an extended time period like the investor, meticulous attention would be focused on price and volume charts only. This type of activity appears to be quite simple and easy, as merely two components are being tracked down, but the price consists of four sub-components: the opening, highest, lowest and closing parts. Then the tracking down technique can be divided in two types, consisting of the traditional analysis method making use of 19 basic patterns and the application of straight lines, besides computerized analysis grouped into six categories: trend following, volatility, momentum, cyclical, market strength as well as support and resistance, producing at least 92 ways of chart reading. It depends on the experience of the technical analyst or chartist to decide which of the indicators are considered most suitable in certain situations. Hence technical analysis is certainly not less complicated than fundamental analysis.
Although the fundamentally oriented investor is interested in long term charts (over one year), attention should also be paid to short term price movements as an additional precaution, because it may happen that fundamental factors which have previously been calculated or taken into consideration cannot be accomodated anymore by unexpected short term developments, as the JSX has experienced lately.

Technical analysis warning by the JSX index steep drop
By paying attention to the JSX long term composite price index since the awakening from its deep sleep in 1989 as depicted herein, we notice that two lowest bottoms have occurred, respectively on November 11, 1991 and September 21, 1998. By connecting both points we have a support line indicating resilience against the worst conditions the exchange has experienced during the relevant 12 year period.
Then in 2000 we can see a steep drop of the JSX index and if the tops (there are four) are connected to one another, a resistance line is formed indicating that the strength of the market is being pressed downward. Unless in the near future some positive development occurs, apparently to be expected from the political sector being sensed as a dominant element, market strengh will not be able to break out of the resistance line. Four downward waves is a sign of an extremely strong pressure and if more waves like that take place, a more powerful market will be needed to overcome the prevailing pressure by means of drastic measures to be taken by the political elite to prevent a suicidal course of action.
The resistance line opposing any recovery will continue to be extended if it is not being stopped and in November 2000, the JSX index might cut through the long term support line at a value of 269 as a sign that the economic situation has become worse than the previous 12 year period.
Naturallly the figure referred to, is not a prediction nor projection into the future, as it is merely denoting a possibility based on preceding history. If the political elite take steps to stop present developments leading to a suicide climax, the said figure will not be reached.

What can still be done by stock exchange participants
Investors being longterm oriented should retain stocks with excellent fundamentals, because it can be presumed that the political elite is also aware of the danger they are encountering together with the people in general, economic circles in particular. In case no positive developments are taking place by November, their position should be reevaluated. It has been published in the news (Kompas, June 9) that Merril Lynch has even bought blue-chip stocks resulting in a temporary rebound of the JSX index. It could be that they are nurturing the same hunch.
Short term speculators can still utilize the up-down waves expected to continue until new developments take place; buy at technical rebound and sell at fundamental drop, while selecting stocks following the JSX index trend. Make use of a short term moving average, say 10 to 30 days, or the head-and-shoulders continuation pattern. Naturally to be able to find the most suitable from among some 300 stocks, while applying fitting indicators, you will be in need of technical anlysis software as can be obtained in the computer consumer market.
Please note that the writer is not using the term "correction" for the present decline of the index, because any ordinary vocabulary would explain its meaning as "that which is substituted or proposed for what is wrong." The market is certainly not wrong if disheartening fundamentals would drive a price or index downward as is the case now, hence a correction would be out of place. Alternately from an exchange terminology point of view, as according to the Stocks & Commodities magazine glossary, the explanation is much more complicated than merely any drop or decline in price, because it has to do with an impulsive trend and should be measured in percentage gains, while the correction could be both ways, up as well as down. The details are beyond the scope of this article. It would be safer and more accurate to merely use the plain words "drop, decline or fall" than "correction," although the latter sounds fancier and impressing.