Technical Tuesdays

13 January 2015

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:

Telkom SA Ltd

Imperial Holdings Ltd

MTN Group Ltd vs Vodacom Group Ltd

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Company data

Dividends

Economic catalysts

South Africa 40 index

Technical view

The South Africa 40 cash index remains in limbo in the medium to long-term, having not yet shown a real commitment to a direction. The arrows on the chart highlight falling highs as well as rising lows, supporting the view that we currently have no clear directional bias at present.

With this in mind, traders would do well to exercise patience by waiting for the market to reveal its hand further before getting involved (medium to long-term). The price is currently trading more or less in the center of the range between support at 41700 and resistance at 43800 (the most recent turning points for the price).

Circled blue we have a bullish engulfing pattern forming, although not yet confirmed with a close. If completed, the pattern alludes to the short-term bias as being bullish, favouring a move towards resistance at 43800. Should this level be exceeded the next level of resistance is anticipated at 44550.

Source: ProRealTime charts, as of 13/01/2015

Equities to watch

Telkom SA Ltd

The price Telkom has formed an ascending triangle formation in a long-term uptrend. These patterns are often referred to as continuation patterns, as they have a habit of occurring before the preceding trend is continued. It is however prudent to wait for a breakout in either direction rather than preempting that direction. 

An upside breakout is considered should the price close above 7100, while a downside breakout is considered should the price close below 6340. A directional move proportional to the height of the pattern (850c) is expected with triangle formations when a breakout does occur. Breakout traders may prefer an upside breakout as an opportunity for long entry as it’s in line with the long-term uptrend. 

A downside breakout is expected to carry a higher degree of risk for short entries, as it is against the uptrend and trend followers may wait for the weakness to play out before considering long entry into the share. The volume bars on the chart show a period of low trader/investor participation at this point, which is typical of short-term consolidations such as this one. 

Breakout traders may use a significant increase in volume to confirm a true breakout of the consolidation when it does occur. In an upside breakout scenario failure would be considered should the price close below 6340.

 

Source:  ProRealTime charts, as of  13/01/2015

Imperial Holdings Ltd

After a short-term downtrend the price of Imperial has formed an ABC reversal pattern. Much like an inverse head and shoulders pattern, this formation alludes to the recent move down now being reversed into an uptrend.

The height of the pattern (A to B) projected from the breakout level (18600) arrives at a proportional target at 20200. The price losing its upward momentum and closing below 17850 (C) would allude to the failure of this bullish reversal pattern.

Source:  ProRealTime charts, as of  13/01/2015

Pairs to watch

MTN Group Ltd vs Vodacom Group Ltd

The chart considered is that of MTN 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 (MTN) has been underperforming security 2 ( Vodacom).

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 MTN, short Vodacom. 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. MTN rising and Vodacom falling
  2. MTN rising faster than Vodacom rising
  3. MTN falling slower than Vodacom falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 8%. A stop-loss would be considered equal to the anticipated gain of 8%.  

Source: P roRealTime charts, as of  13/01/2015

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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