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

Financial Mail - Investors Monthly - - Contents -

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.

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