Yesterday there was some heavy selling in the Indonesian stock market. Foreign investors were net sellers of IDR1.412 trillion (or approximately US$150 million) worth of shares.

Of course they had some catching-up to do as the market was closed on Thursday and Friday for a public holiday. Nevertheless I have to admit that the net foreign selling is getting more intense lately, and the Jakarta Composite Index could come under pressure during the next few weeks as a result.

I Made Sentana from Dow Jones Newswires reported that even Indonesian government bonds continue to fall as investors shift away from emerging market assets amid heightened political and economic uncertainty in Europe. And a dealer added that “foreign funds continue to trim their holdings in local government bonds despite Bank Indonesia’s [suspected] move to support the rupiah in the currency market.”

Moreover new research from the International Monetary Fund has found that advanced and emerging economies have grown so deeply interlinked that a shock from one region could have effects worldwide that are even more profound than in 2008 when financial services firm Lehman Brothers collapsed.

“The world is much, much more interconnected than at any time before. In 2003, this market linkage was 42 percent, but today the equity market linkage between the United States and Asia is 81 percent,” said Zhu Min, the IMF’s deputy managing director, at a conference last week where he discussed the IMF study.

So there is no way emerging markets, in this case Indonesia, can escape the impact of deteriorating market conditions all over the world. Especially not after Indonesia outperformed emerging market equities in 2011 (see chart above).

Now the question is if this is the end of the bull market. With the end of the bull market, I mean the CYCLICAL BULL MARKET and not the secular bull market that began in October 2002, as you can see below on the monthly chart of the Jakarta Composite Index (JCI).

The JCI has most likely just finished Intermediate wave (1) of Primary wave . Therefore we should form Intermediate wave (2), which will consist of three Minor waves (A, B and C), during the next few months.

Intermediate wave (2) is going to be a Corrective Wave, which is defined as a three-wave pattern, or combination of three wave patterns, that moves in the opposite direction of the trend of one larger degree. In other words, the stock market in Indonesia could undergo a severe correction during the second half of this year and the beginning of next year, and retrace part of the previous uptrend or Intermediate wave (1)

Also the weekly chart below of the Jakarta Composite Index clearly shows that the bull market has run out of steam. Again we can see that the JCI has probably ended its latest rally (Minor wave 5), which was also reinforced by the bullish divergences on the Relative Strength Index and the MACD.

In the near term traders will possibly take advantage of any rebound to make some quick profits. But … altogether the market will face stiff resistance at around 4017, which most likely is going to hold back any advance (see chart below)

Just like Teeka Tiwari from The Tycoon Report said not so long ago:

“Always remember that the market hates uncertainty, and we have some big unknowns right now. Short term investors will want to go with the current trend and look for shorting opportunities on rallies. However, long term investors should be looking at this pull back as a buying opportunity.”

In other news, Larry Levin from www.tradingadvantage.com was really at his best last Thursday, definitely not taking any prisoners when showing his disgust for “Fraud Street” and pinpointing the main problem in Europe succinctly:

“Just when I thought I was out, they pull me back in!”
-Michael Corleone, The Godfather Part III.

“Surely everyone on Fraud Street is thinking of the quote above wondering: Are they ever going to stop pulling Greece (Michael) back into the picture? Today’s early market action looked very positive, as if an actual reversal would hit the tape, but they pulled the bear back in: Greece will not be supported by the ECB.

“How can Greece continue to be a problem? Wasn’t the Greek debt problem solved with MORE CREDIT … THREE TIMES? Of course it wasn’t! Like giving a crack addict more crack won’t make him sober, neither will giving a debt addict more debt make him (or a country) solvent. It only makes it worse.

Posted by Nico Omer Jonckheere | VP Research and Analysis, PT. Valbury Asia Futures