Technical Tuesday

20 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

Steinhoff International Holdings Ltd

RMI Holdings Ltd vs Discovery Ltd

South Africa 40 index

Technical view

The  South Africa 40 cash index looks to be breaking out of the small triangle/pennant formation on our chart from last week. The breakout alludes to a short term reversal of the move up rather than a continuation thereof.

Trend followers might consider accumulating long into the current weakness from around support at 46600. Should the weakness extend to close below 45950 a failure of the recent bullish momentum is considered.

Click here to view South Africa 40 chart

Equities in focus

RMI Holdings Ltd vs Discovery Ltd

The chart considered is that of RMI Holdings (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 (RMI Holdings) has been underperforming security 2 ( Discovery). 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 RMI Holdings Short Discovery.

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

Should one of these scenarios play out successfully the expectation would be for a net gain of 4.9%. A stop-loss would be considered equal to the anticipated gain of 4.9%.  

Click here to view the RMI Holdings vs Discovery chart

Mondi Ltd

The share price of Mondi Ltd has consolidated into a triangle shaped pattern (blue triangle). These types of consolidations are generally considered continuation patterns as they have a habit of forming before the trend which preceded the pattern is renewed. It is however prudent to wait for a breakout to occur before pre-empting the breakout direction.

The red triangles on the chart show recent occurrences of the pattern before an uptrend on Mondi Ltd was renewed. Bollinger bands have been added to the chart as they are commonly used as a filter for these types of breakout scenarios.  Breakout traders might consider a close outside of the Bollinger band accompanied by a sharp widening of the distance between the upper and lower band for confirmation of the breakout.

The blue arrows and red circles on the chart illustrate previous occurrences of these Bollinger breakouts. An upside breakout is considered should the price manage to close above resistance at 31100. The height of the pattern predicts a proportionate directional move in the region of 4300c when the breakout finally occurs.

A downside breakout is considered with a price close below 28500, although should this scenario manifest, trend followers might prefer to wait for weakness to play out rather than trade against the long term uptrend. 

Click here to view the Mondi chart

Steinhoff International Holdings Ltd

Since pulling back from an all-time high, Steinhoff international looks to have formed a bullish price reversal. This is supported by the Stochastic crossing out of oversold territory, whilst displaying a positive divergence with the price (blue lines on chart). These indications are in line with the long term uptrend and are considered bullish in technical analysis terms.

The resistance levels at 8630, 8740 and 8875 (in extension) are the favoured upside targets, while a close below the low at 8050 would consider the failure of the bullish indications. 

Click here to view the Steinhoff International 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)

RMI Holdings vs Discovery Ltd chart

Source:  ProRealTime charts, as of 20/10/2015

Mondi Ltd chart

Source:  ProRealTime charts, as of 20/10/2015

Steinhoff International Ltd chart

Source:  ProRealTime charts, as of 20/10/2015

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