Technical Tuesdays

14 October 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:

Spot Gold

BHP Billiton PLC vs Anglo American PLC

Exxaro Resources Ltd vs Kumba Iron Ore Ltd

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Company data

Dividends

Economic catalysts

South Africa 40 index

Technical view

The South Africa 40 cash index has corrected more than 12% from the all-time high and trades firmly below the 200 day simple moving average (blue line). With this in mind, the long-term trend is now considered as down. In the short-term we are seeing a bullish price reversal (circled red) from severely oversold levels.

Oversold signals in a downtrend are generally considered less reliable than oversold signals in an uptrend. Should the bullish price reversal equate to further short-term gains, technical trend followers would look for short entry from resistance between levels 42650 and 42900, favouring further downside with the support target anticipated at 41350.

A break of this support would further favour a move towards the next level of support anticipated at 40000. A price close above resistance at 44150 would indicate the failure of the aforementioned bearish setup, and a renewed short term uptrend would start to be considered.

 

Source: ProRealTime charts, as of 14/10/2014

Resources in focus

Spot Gold

A weekly chart provides a relatively clear picture of spot gold in that the price has been trading in a broad range since July 2013. The price has now formed a bullish engulfing price reversal (circled blue) off the key support of this range at $1,180/oz.

The price reversal is further supported by the stochastic oscillator crossing back out of oversold territory. These considerations are technically bullish, favouring a retest of resistance at $1,280/oz, a break of which further favours a move towards $1,340/oz.

A confirmed close below $1,180 (on a weekly chart) would consider the failure of the aforementioned bullish indications.

Source: ProRealTime charts, as of  14/10/2014

BHP Billiton PLC vs Anglo American PLC 

The chart considered is that of Billiton (candlestick) 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 (Billiton) has been underperforming security 2 ( Anglo American). 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 Billiton, short Anglo American Plc.

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.    Billiton rising and Anglo American Plc
2.    Billiton rising faster than Anglo American Plc
3.    Billiton falling slower than Anglo American Plc

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%.

 

Source: ProRealTime charts, as of  14/10/2014

Exxaro Resources Ltd vs Kumba Iron Ore Ltd

The chart considered is that of Exxaro (candlestick) 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 (Exxaro) has been underperforming security 2 ( Kumba Iron Ore). 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 Exxaro, short Kumba Iron Ore. 

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.    Exxaro rising and Kumba Iron Ore 
2.    Exxaro rising faster than Kumba Iron Ore
3.    Exxaro falling slower than Kumba Iron Ore

Should one of these scenarios play out successfully the expectation would be for a net gain of 7.1%. A stop-loss would be considered equal to the anticipated gain of 7.1%.  

 

Source: ProRealTime charts, as of  14/10/2014

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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