Technical Tuesdays

22 April 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:

Shoprite Holdings Ltd vs Pick n Pay Stores Ltd

Foschini Group Ltd vs Truworths International Ltd

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Company data

Dividends

Economic catalysts

South Africa 40 index

Technical view

The South Africa 40 index continues to trade within the rising wedge formation in the medium–term, and the trading range within the short-term. Although there was an intraday break of support of our range at 42800, the price managed to close above the level before proceeding to rebound within the range. 

The intraday break of support is now marked with a horizontal support line at 42600. The dotted red lines of the range mark the support (42800) and resistance (43640) from the bodies of the candles. The solid red lines of the range mark the support (42600) and resistance (43820) from the highs and lows of the candles. Short-term range traders would continue to look to accumulate near support (42800) and distribute near resistance (43820) with a break above or below the intraday levels (42600 or 43820) as a signal to exit. 

The trading range remains prevalent for short-term traders and would be assumed relevant until a breakout does occur. Should the price close below intraday support (42600), a downside breakout would be considered, with the next level of support at 41600 favoured as the initial target. Should the price close above intraday resistance (43820) an upside breakout would be considered, with trend line resistance at 44430 favoured as the initial target. 

The long-term trend remains up (price firmly above 200MA), although the price activity over the last 4 months (rising wedge) warns of a possible retracement. It is with this reason that long or short trades are considered relative to the breakout and range trade opportunities alluded to above.

Source: ProRealTime charts, as of 22/04/2014

US 500 index

Technical view

The US 500 cash index has rebounded off the lower channel support since breaking out of a rising wedge formation (coloured red). 

A rising wedge formation, in an upward trend, warns that the trend has lost momentum and could undergo a correction in the near -term.     In a strong uptrend the price would gravitate towards channel resistance while deviating from support. Currently the price is instead deviating away from the channel resistance (coloured grey) whilst gravitating towards support. 

Although the long -term trend remains up, the above considerations suggest that the price action currently is weaker on a relative basis when compared to that of 2013. A further consideration would be that it has taken the last six days of gains to erase the two days of losses that preceded. Trend followers would be cautious to use these signals to trade against the long -term trend, but rather use a correction (if it occurs) as an opportunity for long entry. 

Traders that contrary opinion or counter trend may look for short entry nearer the 1900 level with an initial support target back to 1800 being favoured, while a move towards channel resistance (1960) would indicate failure of the bearish signals as well as a resumption of healthy uptrend.

*Please note: The US 500 index can only be traded on an international account

Source: ProRealTime charts, as of 22/04/2014

Equity in focus

Shoprite vs Pick n Pay

The chart considered is that of Shoprite (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 (Shoprite) has been underperforming security 2 (Pick n Pay). 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 Shoprite, short Pick n Pay. 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. Shoprite rising and Pick n Pay falling
  2. Shoprite rising faster than Pick n Pay rising
  3. Shoprite falling slower than Pick n Pay falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 7.4%. A stop-loss would be considered equal to the anticipated gain of 7.4%.  

Source: ProRealTime charts, as of 22/04/2014

Foschini vs Truworths

The chart considered is that of Foschini (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 (Foschini) has been underperforming security 2 (Truworths). 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 Foschini, short Truworths. 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. Foschini rising and Truworths falling
  2. Foschini rising faster than Truworths rising
  3. Foschini falling slower than Truworths falling.

Should one of these scenarios play out successfully the expectation would be for a net gain of 3.3%. A stop-loss would be considered equal to the anticipated gain of 3.3%.

Source: ProRealTime charts, as of 22/04/2014

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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