Indonesian Stocks May Rebound 18% After Recent Plunge: Technical Analysis

Indonesia’s stocks may rise 18 percent after the benchmark index’s slump to a key Fibonacci support level created a “compelling entry point,” Auerbach Grayson & Co. said. 

The Jakarta Composite index plunged 12 percent from its Dec. 9 record through Jan. 24 as overseas investors exited the nation’s stocks on concern faster inflation would spur higher borrowing costs in Southeast Asia’s biggest economy. A drop of 10 percent or more from a peak signifies a so-called correction to some analysts and investors. 

“Our analysis suggests that the 10 percent correction to a key Fibonacci support has created a compelling entry point,” Richard Ross, global technical strategist at Auerbach Grayson in New York, wrote in a note yesterday. “The well-defined uptrend remains intact.” 

Ross said his initial upside target for the gauge is 4,126, an 18 percent gain from yesterday’s closing level of 3,501.72. The index surged 46 percent last year, the best performer among Asia’s 15 biggest markets, as record-low interest rates helped boost economic growth and corporate earnings. The measure advanced 1 percent to 3,536.54 at the 12 p.m. local-time break. 

The central bank has kept interest rates at a record low even as the fastest inflation in 20 months threatens incomes for Indonesians, 29 percent of whom earn less than $2 a day. Policy makers in countries from India to Thailand have boosted borrowing costs in the past 10 months to curb rising prices. 

Stocks on the index traded at 13.2 times estimated earnings on Jan. 24, the lowest level since May and down from a multiple of 18.2 on Dec. 31, data compiled by Bloomberg show.

Stock Valuations 

Indonesian stocks’ decline is a buying opportunity, as the rural-based economy will benefit from rising commodity prices while avoiding runaway inflation, Willianto Ie, an analyst at Nomura Holdings Inc., wrote in a note today. “The valuation of the Indonesian market is still far from demanding,” he said. 

Foreign investors as of Jan. 25 sold a net $428 million of Indonesian stocks this month, the most since May 2005, data compiled by Bloomberg show. 

Ross said Auerbach Grayson favors mining stocks. The Jakarta Mining Index is in a “strong technical position,” with miners displaying relative strength through the recent correction, he wrote. “Bullish trends are accelerating.” The mining gauge advanced 1.7 percent today, paring an annual loss to 1.2 percent. 

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index. A support level is an area where they anticipate buy orders to be clustered. Fibonacci analysis is based on the theory that prices tend to drop or climb by certain percentages after reaching a high or low. Source: Reuters