RICHARDS Track­ing re­source re­cov­ery

Im­pala and Sa­sol are show­ing signs of a rally

Financial Mail - Investors Monthly - - Guest Column - KARIN I own shares in both Im­pala and Sa­sol. You can fol­low me on Twit­ter @Richard­s_Karin

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.

Newspapers in English

Newspapers from South Africa

© PressReader. All rights reserved.