Be­tween bulls and bears

JSE top 40 looks choppy as re­sources climb and the do­mes­tic sec­tor tops out

Financial Mail - Investors Monthly - - Analysis: Technical -

he JSE top 40 in­dex is cur­rently trad­ing at about the same level it was three years ago. But that fact masks the volatil­ity that has been present, as well as the sec­toral shifts that have oc­curred over that time.

The top 40 has traded in a range be­tween 42,000 and 49,000 over the past three years. That’s a 16% trad­ing range. The 50-week mov­ing av­er­age is gen­er­ally a good in­di­ca­tion of a bull mar­ket or a bear mar­ket. An up­ward-slop­ing 50-week mov­ing av­er­age typ­i­cally in­di­cates a mar­ket with a bullish tone. On the other hand, a 50-week mov­ing av­er­age that slopes down­wards in­di­cates weak mo­men­tum and is as­so­ci­ated with a bear­ish mar­ket en­vi­ron­ment.

The 50-week mov­ing av­er­age on the top 40 in­dex has been track­ing side­ways since early 2015. This has made the trad­ing en­vi­ron­ment tricky, leav­ing one un­sure whether to trade ac­cord­ing to a bull or bear mar­ket strat­egy.

The truth is that, at an over­all in­dex level, it is nei­ther a bull nor a bear mar­ket. It has been a side­ways, choppy mar­ket with no clear trend. But be­neath the sur­face there have been well-de­fined bull and bear markets within dif­fer­ent sec­tors.

The do­mes­tic area of the JSE had been the strong­est area of the mar­ket un­til the start of 2016. Fi­nan­cial and in­dus­trial stocks en­joyed solid up­ward trends from early 2009 un­til late 2015. Dur­ing that time, the re­sources sec­tor was un­der pres­sure.

Re­sources stocks were gen­er­ally in a bear mar­ket un­til late 2015, and fi­nan­cial and

Tin­dus­trial stocks were in a bull mar­ket dur­ing that time. All that be­gan to change at the start of 2016. Sud­denly re­sources be­gan to perk up, and many shares in the re­sources space have since en­joyed gains of more than 200%.

All the while, many do­mes­tic stocks have come hor­ri­bly off the boil. The likes of gen­eral re­tail­ers and some fi­nan­cial stocks have had a tor­rid time in 2016. This can be seen in the chart of the findi 30 in­dex (J213). This in­dex rep­re­sents 30 of the largest in­dus­trial and fi­nan­cial stocks on the JSE. It’s a good rep­re­sen­ta­tion of “SA Inc”.

What is notable about the chart of the findi 30 in­dex is that it has bro­ken down be­low the bot­tom of a tri­an­gle pat­tern and has also bro­ken con­vinc­ingly be­low its 50-week mov­ing av­er­age for the first time since 2009. The 50-week mov­ing av­er­age has also taken on a neg­a­tive slope for the first time since 2009.

This is a mean­ing­ful devel­op­ment, as it im­plies that the bull mar­ket in the findi 30 in­dex has prob­a­bly come to an end. From here it may ei­ther track side­ways or show fur­ther weak­ness. But sub­stan­tial strength looks un­likely.

As the findi 30 in­dex tops out, the re­sources in­dex seems to have found buy­ing in­ter­est this year, and it looks as if that area of the mar­ket will now prop up the top 40.

This is the op­po­site of what we have be­come used to in the past seven years. It now looks as though one needs to be over­weight in the re­sources sec­tor and un­der­weight in the do­mes­tic sec­tors of the mar­ket.

What does all this mean for the top 40? Un­for­tu­nately, it prob­a­bly means more of the same: side­ways, choppy ac­tion with no clear trend. Tech­ni­cally, the break be­low 45,000 on the top 40 in­dex val­i­dated a head-and-shoul­ders pat­tern that projects down to 42,000. That is the area where the bot­tom of the broad range comes in.

If the top 40 trades down to that level and holds the 42,000 sup­port, it may present a buy­ing op­por­tu­nity for an over­sold bounce on the broader mar­ket.

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