TALK­ING TECH­NI­CALS

There is a strong like­li­hood that the mar­ket will rally to a new high

Financial Mail - Investors Monthly - - Contents - GARTH MACKENZIE www.trader­scorner.co.za

In last month’s col­umn, I high­lighted the fact that the Top 40 In­dex on the JSE had reversed down from the 47 200 level. That was a sig­nif­i­cant devel­op­ment as the 47 200 level marks a level of over­head re­sis­tance that was formed by the prior mar­ket high from July 2014.

It was sug­gested that the fail­ure and re­ver­sal down from the 47 200 level would most likely mark the start of a pe­riod of con­sol­i­da­tion for the Top 40 and that we could ex­pect to see some grad­ual weak­ness down to the 45 300 area where the first sig­nif­i­cant area of sup­port came into play. That has in­deed hap­pened.

The Top 40 has con­sol­i­dated lower in a con­trolled fash­ion through­out March, which is healthy. The con­sol­i­da­tion has hap­pened in a neat chan­nel or flag-like pat­tern. This pull­back has al­lowed the Sto­chas­tic Os­cil­la­tor and Rel­a­tive Strength In­dex to work off their over­bought con­di­tions, and we have seen both of th­ese mo­men­tum in­di­ca­tors move to­wards over­sold ter­ri­tory.

The Sto­chas­tic Os­cil­la­tor ex­hib­ited pos­i­tive di­ver­gence through late March, which has bullish im­pli­ca­tions. This oc­curs when the Sto­chas­tic Os­cil­la­tor makes a higher low and does not con­firm the lower low that was made in the price. It im­plies there are bullish un­der­tones to the in­tra-day ac­tiv­ity on the mar­ket even though the price may be mak­ing lower closing lows. This pos­i­tive di­ver­gence of­ten pre­empts a move higher.

The Rel­a­tive Strength In­dex has bro­ken above its own down­trend re­sis­tance and this has been fol­lowed by a break to the top of the re­cent chan­nel by the price. The break above 46 400 marks a break to the top end of the re­cent con­sol­i­da­tion chan­nel and is a bullish break in the price of the Top 40. This opens the way for a move back up to the 47 200 level on the Top 40 and pos­si­bly a break to new highs. Given that we have now seen five weeks of con­sol­i­da­tion in the in­dex, this re­sets the price ac­tion and opens a high like­li­hood that the mar­ket will rally to a new high be­yond that fig­ure. If a re­sis­tance level is tested enough times with­out any mean­ing­ful pull­back, then it im­plies that buy­ing in­ter­est is strong and a break through the re­sis­tance is ul­ti­mately the most likely out­come. We’ve seen the 47 200 over­head re­sis­tance be­ing chal­lenged on sev­eral oc­ca­sions in the past year and the cur­rent setup looks like the best chance for a break be­yond it.

A break be­yond that re­sis­tance would most likely drive some ag­gres­sive short cov­er­ing as well as some nat­u­ral buy­ing to take the in­dex to new highs closer to 48 000 in the near term. The cur­rent setup looks bullish but if we were to see the mar­ket turn lower and break be­low the 46 000 level, then it will put this bullish out­look on hold.

The rand has been weak since the start of 2015 when com­pared with the US dollar. This is mainly a func­tion of a strong US dollar. The cur­rency pair moved out to R12,50 in early March be­fore strength­en­ing back to R11,75 just a few weeks later. R11,75 is a tech­ni­cally sig­nif­i­cant level for the rand dollar pair. It is an area where mul­ti­ple sup­port lev­els come into play. A re­ver­sal up from the R11,75 area will of­fer an op­por­tu­nity to ini­ti­ate rand shorts. A break be­yond R12 would quite likely cause the rand to weaken back to­wards the R12,50 area again. Only a con­vinc­ing break be­low R11,70 will put the bear­ish rand view on hold. Mo­men­tum seems to be very much on the side of the US dollar mov­ing stronger, and if this mo­men­tum is to con­tinue, then it adds a greater like­li­hood that the rand will weaken against the US dollar.

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