TALKING TECHNICALS

The rand is on the back foot, and nine-year-old bull market may be nearing its end

The rand/dollar exchange rate has formed a saucer-bottom pattern over the course of 2018 so far.

In April the currency broke above a key technical level at R12.10. That level marked a number of highs from February through to April.

The break above R12.10 opened a near-term target of R12.60 that was met within two weeks of the breakout.

A strengthening US dollar during April was largely responsible for the weakness in the rand over that time. In May, the currency pulled back towards the technical breakout area at R12.10.

That R12.10 level presents a fairly important dollar support level at the time of writing.

The 50-day moving average also comes in at R12.05 to offer further dollar support.

The R12.00-R12.10 area is likely to prove sticky into any further rand strength soon.

If a reversal off that area were to occur, it’s possible that the rand may move a bit weaker and trade in a choppy range between R12.00 and R12.50 for the near term.

Only a convincing and sustained move below the 50-day moving average would begin to put the rand on the front foot again and point to further rand strength towards the February lows at R11.50. But it looks as if choppy action between the 50day moving average and the 200-day moving average is likely in the near term.

The S&P500 chart was covered in this column in February this year. On the weekly chart the important support level at 2,600 was identified. That level has held on a number of occasions in the past few months.

A number of analysts and commentators have been drawn to a large triangular pattern that has been forming over the four months since the end of January. The lower end of that triangle pattern corresponds with the 200-day moving average that has been tested on a number of occasions this year. That moving average also corresponds with the 2,600 support figure. The upper boundary of the triangle pattern comes in at 2,700.

The market has recently broken above the 2,700 level, which validates that triangle pattern. It is a bullish break, and in strictly technical terms it should open further upside potential. The first upside target is 2,800, which was the March high, and the next the January high of 2,875. While the market is above 2,700 those upside targets remain in sight.

Volatility levels rose in the first few months of 2018 following a year of almost nonexistent volatility. Markets do tend to become more volatile around the top, so the recent volatility may be a warning sign that the nine-year old bull market is becoming mature and is showing fatigue.

Risks are rising for the equity market on a medium-term view. Rising interest rates and high debt levels are a cocktail that could provide a major headwind for equity markets over the next few years.

While the current technical setup looks encouraging for the near term, what lies beyond that may be somewhat ominous. While the S&P500 holds above the 200-day moving average, the benefit of the doubt favours the bulls, but if the market were to move below that moving average, caution would be advised.