Technical Tuesday

13 October 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:

Mondi Ltd vs Sappi Ltd

Pick n Pay Stores Ltd

Firstrand Ltd vs Nedbank Group Ltd

South Africa 40 index

Technical view

The  South Africa 40 cash index traded through the initial upside target from last week at 47400, but has not yet realised the second upside target suggested at 48500. The price has instead consolidated into a pennant formation, which is essentially a small triangle consolidation. Pennant formations highlight a brief pause in the directional move and are considered continuation patterns.

These patterns are referred to as continuation patterns as they have a habit of forming before the trend, which preceded (which in this scenario is up) is continued. A breakout can however occur in either direction and it is considered prudent to wait for a breakout before committing to a short-term direction. Should a downside breakout occur, trend followers might wait for weakness to play out before looking for long entry around levels 46175 and 46600.

A close above the resistance of the pattern would also favour renewed gains. The upside targets favoured in both scenarios are considered at 48500 and 49120, the latter being the projected target from the pennant formation. Should weakness ensue and the price close below support at 45950, the bullish momentum would be considered to have failed for the time being.

Click here to view South Africa 40 chart

Equities in focus

Mondi Ltd vs Sappi Ltd

The chart considered is that of Mondi Ltd (candlestick) with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) compares the price of one security with that of another in ratio format. The RSC has experienced a decline in value recently which highlights that security 1 (Mondi Ltd) has been underperforming security 2 ( Sappi Ltd).

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 Ltd, short Sappi Ltd.

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 Ltd rising and Sappi Ltd falling
  2. Mondi Ltd rising faster than Sappi Ltd rising
  3. Mondi Ltd falling slower than Sappi Ltd falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 8.5%. A stop-loss would be considered equal to the anticipated gain of 8.5%.  

Click here to view the Mondi vs Sappi chart

Pick n Pay Stores Ltd

After a short-term decline from recent highs, the share price of Pick n Pay has formed a bullish price reversal. The price reversal is supported by the stochastic oscillator crossing though its trigger line in oversold territory and displaying a positive divergence with the price (red lines on chart).

These indications are considered short-term bullish. Previous resistance at 6690 is the initial price target favoured, while a close below the short-term low, at 6030, would consider the failure of the bullish indications.

Click here to view the Pick n Pay chart

Firstrand Ltd vs Nedbank Group Ltd

The chart considered is that of Firstrand (candlestick) with a Relative Strength Comparison (RSC) indicator added. The RSC (blue line) compares the price of one security with that of another in ratio format. The RSC has experienced a decline in value recently which highlights that security 1 (Firstrand) has been underperforming security 2 ( Nedbank).

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 Firstrand, short Nedbank.

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. Firstrand rising and Nedbank falling
  2. Firstrand rising faster than Nedbank rising
  3. Firstrand falling slower than Nedbank falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 3.8%. A stop-loss would be considered equal to the anticipated gain of 3.8%.  

Click here to view the Firstrand vs Nedbank chart

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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IG provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of the above information. Consequently any person acting on it does so entirely at his or her own risk. The research does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. This communication must not be reproduced or further distributed. The price levels provided are derived from ProRealtime Charts (IT-Finance)

South Africa 40 chart

Source:  ProRealTime charts, as of 13/10/2015

Mondi Ltd vs Sappi Ltd

Source:  ProRealTime charts, as of 13/10/2015

Pick n Pay Ltd

Source:  ProRealTime charts, as of 13/10/2015

Firstrand vs Nedbank Group

Source:  ProRealTime charts, as of 13/10/2015

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