HOT STOCK: UMW Holdings Bhd - Testing 5-year Resistance

The share price of UMW Holdings has been consolidating for the past 5 years. However, this does not change its longerterm trend which remains positive. Therefore, an upward continuation is expected and positions can be initiated on a successful breakout or otherwise, on pullback above the latest support level.

The stock was one of the outperformers during the market run-up in 2006-2007, which saw  its price almost tripling. However, the strong performance was not repeated during the current broad market rally that kicked off in early 2009. The stock traded sideways instead – now in its multi-year range-bound trading – and it was clearly consolidating the gains of the 2005-2007 rally.

However, the underperformance for the past 3 year has not  led to a change in trend. The  longer-term  upward bias continues to buoy the stock, as evidenced from the higher lows. The recent late 2011-low of RM6.40 has turned out to be a strong support level, owing to the oversold weekly RSI that lies just above the lows recorded in 2008.

Therefore, the upward trend is intact and attempts to make a new high cannot be discounted entirely as long as the stock stays above RM6.40.  In fact, the stock is testing the 5-year high for the past 3 weeks and a successful violation of RM5.70 should see it trading higher, in line with a new rally  up-leg. Positions can be initiated if  this happens with a close below RM5.50 as the stop loss. Alternatively, accumulation can be undertaken on any pullback in light of the longer-term uptrend.

The support level lies at the psychological RM7.00, which is also the 50% retracement of the current 7-month rally. Support may also come at RM7.13 and RM6.85, both being Fibonacci retracement levels of the same rally. Based on the measured move of 2009-2011, the price target is RM9.00. Again, strong support is expected at RM6.40 but a violation of which could see  the stock trading lower. This  violation may result in the stock trading in an even larger sideways band, with RM5.00 being the next strong support level.

Source: OSK188