Technical Tuesdays

2 September 2014

Our weekly technical report is compiled by in-house market analyst Shaun Murison

In the report this week we look at the South Africa 40 index, key indicators as well as the following equities:

Discovery Ltd vs MMI Holdings Ltd

RMI Holdings

RMB Holdings Ltd

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Company data

Dividends

Economic catalysts

South Africa 40 index

Technical view

The South Africa 40 cash index has traded back to the initial support target at 45850 over the last week, but failed to extend the weakness and arrive at the lower support target from the wedge formation at 45050.

Following the bullish reversal (circled blue) which has brought the price back above the 45850 level, the wedge pattern is no longer deemed relevant and has therefore been removed from the chart. The 20 and 50 day simple moving averages (20MA and 50MA) highlight the current churning nature of the SA40 index as the price whipsaws back and forth through these indicators.

This confirms the short and medium-term consolidation the SA40 index is currently in. With the lack of commitment to a direction, especially in the near-term, while the price trades more or less in the centre of the broader consolidation between 45050 and 47160, we await a confirmation for a new directional bias.

Aggressive traders may look to trade within the horizontal levels of support and resistance, much like a pivot point trading methodology i.e. using a break of 46500 to target a move towards 47160 or waiting for a downside break of 45850 to target a move towards 45050.

However the lack of directional intent in the near-term would find favour with using the ultimate levels of support and resistance of the broader range (45050 and 47160) instead for either a breakout and new directional commitment or reversals off these levels for a range trading opportunity.

 

Source: ProRealTime charts, as of 02/09/2014

Equities in focus

Discovery Ltd vs MMI Holdings Ltd

The chart considered is that of Discovery with a Relative Strength Comparison (RSC) indicator added. The RSC compares the price of one security with that of another in a ratio format.

The RSC has experienced a decline in value recently which highlights that security 1 (Discovery) has been underperforming security 2 ( MMI Holdings). Bollinger Bands have been added to the RSC and highlight the underperformance of security 1 reaching abnormality relative to the usual relationship of the two securities.

It is expected that the relationship between the two securities will revert back to normality favouring a possible pair trade opportunity i.e. long Discovery, short MMI Holdings. The target from the technical indications would be for the RSC to move back towards the 20MA (red line) which is regarded as the mean. This could occur with the price movements of the securities in a number of ways:

  1. Discovery rising and MMI Holdings falling
  2. Discovery rising faster than MMI Holdings rising
  3. Discovery falling slower than MMI Holdings falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 3%. A stop-loss would be considered equal to the anticipated gain of 3%. 

Source: ProRealTime charts, as of  02/09/2014

RMI Holdings  

RMI Holdings is currently breaking out of an inverse head and shoulders formation (labelled L, H & R). The pattern marks a bullish reversal of the short-term downtrend from July 2014 to August 2014.

The height of the pattern projected from the breakout level (vertical red lines) arrives at a proportionate upside target of 3590. Breakout traders who missed the initial breakout entry would be hoping for a pullback towards support at 3345 for long entry.

The price trading below the right shoulder (labelled R) at 3240 would consider the failure of the pattern. 

Source:  ProRealTime charts, as of  02/09/2014

RMB Holdings Ltd

The price of RMB Holdings is currently breaking out of a triangle consolidation. The price looks to be continuing the preceding uptrend and an upside target is projected from the pattern at 5935.

A triangle target is derived by measuring the height of the pattern and projecting an equal distance from the breakout level. Conservative traders of these patterns might wait for a pullback towards the breakout level at 5690 for a second chance at long entry.

The price closing below the support of the triangle at 5615 would indicate the failure of the aforementioned bullish indication.

Source:  ProRealTime charts, as of  02/09/2014

Market overview

A Technical Analysis overview of key indicators and sectors with regards to trend, volatility and overbought/oversold conditions.

Click to view this week's market overview

 

 

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