RICHARDS Tracking resource recovery
Impala and Sasol are showing signs of a rally
The collapse of our resource stocks has driven investors to distraction. Many have bailed out, vowing never to return. However, all stocks eventually either disappear or change direction. At major cyclical turns the fundamental picture is usually still bleak and disbelief is evident. This is where technical analysis can be valuable. It provides an objective assessment, based purely on price, of whether a stock has finally bottomed.
Here we look at two resource stocks that have been beaten down, but are showing signs of a recovery and a possible cyclical change in trend. Impala Platinum Impala declined from a high of R368 in March 2008 to a low of R23 in December 2015. That’s a decline of 93%. At the time of writing it is trading at R50.50.
Impala has broken above the important 200-day moving average for the first time in two years.
It is making a sequence of higher highs and higher lows — vital in building a reversal.
It has constructed a usually reliable reversal pattern, known as a “reverse head & shoulders”, indicated on the chart as S-H-S. The neckline at R50 (in red) has been broken and is being tested. A retest is healthy, but it is important that the neckline holds. A small flush or two below it is in order, but if it falls below the low of the right shoulder (R42), the pattern is negated. The uptrend itself may not be negated, but a new pattern would have to build.
The US dollar platinum price is bullish, with a similar pattern.
The measured target out of the pattern, being the height of the pattern projected up, is R74.50 (+47%).
The medium-term target (weeks to months) is R86 (+70%), where strong historical resistance will start to kick in.
Impala has the potential for far higher targets in years to come. It is not possible to give exact targets now, as it will depend on future patterns and momentum.
Despite the above, there are no guarantees in markets. Any analysis can fail, particularly in the current climate and with volatile commodities. Thus it is important to have a stop, even for longer-term investors.
Stop is a daily close below R47. Longer-term investors use R42 or, if more tolerant, the 200-day moving average at R39.60.
Sasol, a cornerstone stock in many portfolios, has caused investors much anguish. It fell by 44%, from a high of R645 in June 2013 to a low of R359 in December 2015. At the time of writing it is trading at R445. The chart indicates that there may be good reason for optimism.
Sasol has been consolidating in a wide range between R380 and R480 for almost 18 months.
The consolidation has formed a rounded cupping pattern that is bullish. Cupping patterns usually break to the upside.
The US dollar chart for Brent crude is also bullish, but it faces stiff resistance as it approaches $50.
The rim of the cup is at R493. A daily close above R493 would technically break the neckline, but I suspect the psychologically important R500 will need to be negotiated for final confirmation.
The target once the neckline is broken is R595.
My suggestion is to start accumulating on weakness, add more above R462 (the 200-week moving average, not shown) and finish buying on the break.
Investors can use the 200-day moving average at R420 as a stop, or ride it out to the bottom of the range if they can stomach it. Ultimate failure of the pattern will be signalled by a daily close below R358.80.
The lengthy consolidation is frustrating for investors, but the longer a pattern takes to build, the more powerful the break and more reliable the target.