Technical Tuesdays

8 July 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:

Illovo Sugar Ltd vs Tongaat Hulett Ltd

Mondi Ltd vs Sappi Ltd

Group Five Ltd vs Aveng Ltd

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Company data

Dividends

Economic catalysts

South Africa 40 index

Technical view

Over the last week, the South Africa 40 cash index closed above the high at 46400, and proceeded to rally past our resistance target at 46900. The blue circles highlight how the channel utilised in previous weeks (dotted parallel red lines) has been breached at both the support and resistance levels.

The channel has now been widened to include these significant turning points (solid parallel red lines). Currently, the price is pulling back from the recent all-time high. The pullback has not yet given signs of ending as the price continues to make lower highs and lower lows over the last two days. Horizontal support at 46400 is favoured, while the short-term retrace is underway, a break of which favours a move towards channel support at 45700. 

The long-term trend remains up and short-term weakness is still not an indication of a trend reversal. Trend followers would look to the short-term retracement as an opportunity to join the long-term uptrend at the respective support levels indicated, rather than an opportunity to trade counter trend. The recent low at 45160 needs to be broken for a trend reversal to be considered.

Source: ProRealTime charts, as of 08/07/2014

Equities in focus

Illovo Sugar Ltd Vs Tongaat Hulett Ltd

The chart considered is that of Illovo (candle chart) with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) 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 (Illovo) has been underperforming security 2 ( Tongaat Hullet). 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 Illovo, short Tongaat Hullets. 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. Illovo rising and Tongaat Hullet falling
  2. Illovo rising faster than Tongaat Hullet rising
  3. Illovo falling slower than Tongaat Hullet falling. 

Should one of these scenarios play out successfully the expectation would be for a net gain of 6%. A stop-loss would be considered equal to the anticipated gain of 6%.

Source: ProRealTime charts, as of  08/07/2014

Mondi Ltd Vs Sappi Ltd 

The chart considered is that of Mondi (candle chart) with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) 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 (Mondi) has been underperforming security 2 ( Sappi). 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 Mondi, short Sappi. 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. Mondi rising and Sappi falling
  2. Mondi rising faster than Sappi rising
  3. Mondi falling slower than Sappi falling. 

Should one of these scenarios play out successfully the expectation would be for a net gain of 7.75%. A stop-loss would be considered equal to the anticipated gain of 7.75%.

Source:  ProRealTime charts, as of  08/07/2014

Group Five Ltd vs Aveng Ltd

The chart considered is that of Group Five (candle chart) with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) 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 (Group Five) has been underperforming security 2 ( Aveng). 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 Group Five, short Aveng. 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. Group Five rising and Aveng falling
  2. Group Five rising faster than Aveng rising
  3. Group Five falling slower than Aveng falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 7%. A stop-loss would be considered equal to the anticipated gain of 7%.

Source:  ProRealTime charts, as of  08/07/2014

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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