Hold­ing will be worth the wait

In­te­grated en­ergy and chem­i­cals gi­ant Sa­sol has had to en­dure ma­jor drops in its share price over the past few years, but look­ing at the charts, a re­cov­ery is pend­ing.

Finweek English Edition - - MARKETPLACE KILLER TRADE - Ed­i­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Standard Bank as part of the re­search team in t

long-term shareholders in Sa­sol have been in for a rough ride, with the stock still trad­ing about 40% be­low its 2014 highs, mainly be­cause of the drop in Brent crude prices. Sa­sol is very sen­si­tive to Brent crude movement, in­clud­ing the rand/ dollar ex­change rate and ul­ti­mately the rand price of the commodity.

Ac­cord­ing to Reuters, hedge fund man­agers have be­come very bear­ish about the out­look for oil prices as pro­duc­tion from coun­tries out­side the Or­ga­ni­za­tion of Petroleum Ex­port­ing Coun­tries (Opec) grows and threat­ens to un­der­mine the ef­fec­tive­ness of Opec’s out­put con­trols. With con­cerns mount­ing that Opec’s agreed pro­duc­tion cuts will fail to sup­port prices, Brent crude de­clined to sev­en­month lows in June, while US crude dropped to its low­est lev­els since Septem­ber 2016.

Sa­sol, an in­ter­na­tional in­te­grated chem­i­cals and en­ergy com­pany, has been range-bound be­tween 50 000c/share and 35 400c/share for the past two years, and is cur­rently tee­ter­ing on the 35 400c/share key sup­port level – main­tained since Jan­uary 2015. Sa­sol reached its best at 65 300c/share in 2013, which was shortly fol­lowed by a huge sell-off when oil prices fell, the rand re­cov­ered and the costs at its Lake Charles project in the US in­creased rapidly to $11bn from an ini­tial es­ti­mate of $8.9bn. Sa­sol has breached the sup­port trend­line of its long-term bull trend and is cur­rently tee­ter­ing on key sup­port at 35 400c/share. Some traders could find these lev­els as a good buy­ing op­por­tu­nity, if Sa­sol bounces on that key sup­port level and ex­tends its side­ways pat­tern.

Its Lake Charles chem­i­cals project, cur­rently un­der con­struc­tion in the US, is ex­pected to be fully op­er­a­tional in the 2019 fi­nan­cial year. Cash flows gen­er­ated out­side SA will then be­gin to equal that gen­er­ated within South Africa, Moody’s said in a re­cent credit re­port. Cur­rently, around 60% of Sa­sol’s to­tal op­er­at­ing cash flow is gen­er­ated in SA, mean­ing the com­pany is to a large ex­tent ex­posed to the South African op­er­at­ing en­vi­ron­ment, it said. Sa­sol be­lieves Lake Charles, which will pro­duce value-added chem­i­cals, will be more com­pet­i­tive than a num­ber of other plants that are cur­rently op­er­a­tional or un­der con­struc­tion.

For most long-term in­vestors, hold­ing onto Sa­sol shares is worth the wait and will pay off when Sa­sol even­tu­ally re­bounds and retests prior highs.

How to trade it:

Go long: If Sa­sol re­tains firm sup­port at 35 400c/share, then up­side to ei­ther 41 150c/ share or 43 620c/share would be pos­si­ble. With the three-week rel­a­tive strength in­dex (RSI) in mega-over­sold ter­ri­tory, a re­cov­ery is pend­ing soon. In­crease long po­si­tions above 43 620c/share as gains to­wards 50 000c/share could fol­low. A pos­i­tive end to the long-term side­ways pat­tern would be con­firmed above that level. Go short: Down­side through 35 400c/share would be a very bear­ish move. A neg­a­tive break­out out of both the pri­mary bull trend and the side­ways pat­tern would be con­firmed. If Sa­sol re­cov­ers in the near term from its over­sold po­si­tion on the weekly chart but fails to push through the 43 620c/ share level, pre­pare to go short be­low 35 400c/share. The first down­side tar­get would be at 30 050c/share, with the next be­ing at 21 655c/share.

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