Resources index doing nicely, but there are concerns over financials and industrials
The JSE resources index has been trending higher since early 2016. It’s been the outperforming sector of the market for the past four years.
Gains in diversified miners Anglo American and BHP Group have been responsible for much of this. Gains in the gold and platinum mining sectors have contributed too.
In the second and third quarters of 2019 the index has been consolidating after a strong first quarter. This has happened many times since 2016. The index has nearly doubled in value, but corrections of between 15% and 20% have occurred four times.
The recent correction began after the peak in June. That has allowed the index to retrace to the upward trend from early 2016. This is the fifth test of that trend line in four years.
The consolidation seems to have taken the form of a falling wedge pattern. These are typically bullish continuation patterns within an uptrend and they usually break to the upside. Indeed, the prior corrections in the resources index have all taken the form of continuation patterns that have ultimately broken to the upside.
Recent trading action has seen the index form a weekly reversal off the four-year upward trend. That suggests an upward break is likely, and the upward trend will continue. As long as the recent lows at 42,500 hold, the likelihood is for the price to move higher and challenge the highs set this year at around 49,500.
A break of the four-year uptrend would be concerning, as it would indicate that the bull market for this index would have broken. For now, the trend is your friend and you have to give it the benefit of the doubt until it’s proved otherwise.
In Q2 and Q3, the findi30 index has been tracking a broad range between 72,000 and 80,000. That’s a 10% range and the boundaries have been visited seven times since March, making for volatile trading action. The findi30 is a useful read of SA Inc stocks. It includes many domestic stocks that form part of the industrial and financial indices. It doesn’t include mining or resourcesrelated companies.
It has been under pressure since mid-September, making a rapid descent from the top of the range to the bottom. The 72,000 range low has held again at the time of writing and the index seems to be bouncing off the lower channel support.
What is of some concern is that the 50-day moving average has taken on a negative direction in the past few months. The 50-day moving average is a useful guide to medium-term momentum. When it is pointing up, the momentum is upwards. When it is pointing down, the medium-term momentum is weak. If this persists, there is a risk that the index may make a lower high and then threaten to