TALK­ING TECH­NI­CALS

Re­sources in­dex do­ing nicely, but there are con­cerns over fi­nan­cials and in­dus­tri­als

Financial Mail - Investors Monthly - - Contents -

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

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