Technical Tuesdays

16 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:

Sanlam Ltd vs RMI Holdings

Adcock Ingram Holdings Ltd

MTN Group Ltd

View market data

Company data

Dividends

Economic catalysts

South Africa 40 index

Technical view

The South Africa 40 cash index has been increasingly difficult to predict as the short and medium-term consolidations persist and we await for directional confirmation. Last weeks proposed bullish flag formation failed to confirm with a breakout before realizing the failure level suggested. The blue arrows highlight failed breakouts of the short-term range between levels 45850 and 46500.

The lower horizontal level at 45550 has proven to be more relevant than the 45850 level as the price has experienced a short-term reversal off this level. With this in mind, the lower support level at 45550 has been added and the 45850 level is removed moving forward. The short-term weakness witnesses a gravitation towards support at 45550 and a break of this level favours a move towards the outskirts of the broader range at 45050.

In previous weeks, it has been guided that the price activity “churn” in the short-term carries a higher degree of risk in near-term trading and a true commitment to the continuation or reversal of the longer-term uptrend remains with the 45050 and 47160 levels. It is with this reason waiting for renewed directional confirmation is preferred while the broader consolidation persists.

 

Source: ProRealTime charts, as of 16/09/2014

Equities in focus

Sanlam Ltd vs RMI Holdings

The chart considered is that of Sanlam (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 (Sanlam) has been underperforming security 2 (RMI 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 MMI Holdings and short Sanlam.

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. Sanlam rising and RMI Holdings falling
  2. Sanlam rising faster than RMI Holdings rising
  3. Sanlam falling slower than RMI Holdings falling

Should one of these scenarios play out successfully the expectation would be for a net gain of 4%. A stop-loss would be considered equal to the anticipated gain of 4%.

Source: ProRealTime charts, as of  16/09/2014

Adcock Ingram Holdings Ltd 

The price of Adcock looks to be forming a Bullish Harami (circled blue) candlestick reversal. The Stochastic Oscillator is crossing through its signal line in oversold territory, whilst showing a positive divergence with the price.

Positive divergence occurs when the lows in the price and the lows on the indicator are not conforming to the same directional bias (dotted red lines). These are considered bullish indications and favour a short-term rebound in price with resistance anticipated at 5200.

The price closing below support at 4620 would consider the failure of these bullish indications. 

Source: ProRealTime charts, as of  16/09/2014

MTN Group Ltd

The price of MTN looks to be forming a Bullish Engulfing (circled blue) candlestick reversal. The bullish reversal is finding support on previous closing resistance at 24680, a phenomenon referred to as reverse polarity in technical analysis, i.e. support becomes resistance and vice versa.

The initial breakout of the 24680 level was supported by a strong increase in volume alluding to the sustainability of the initial move. A retest of resistance at 26335 provides the favoured target, while a price close below support at 24170 would consider the failure of the bullish indications.

Source: ProRealTime charts, as of  16/09/2014

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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