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