Technical Tuesday

27 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:

Foschini Group Ltd vs Truworths International Ltd

Shoprite Holdings Ltd

Coronation Fund Managers Ltd

South Africa 40 index

Technical view

The South Africa 40 cash index produced a false downside breakout (circled blue) from the pennant formation before resuming the uptrend which preceded the consolidation. The false breakout reinforces the guidance that short term weakness is viewed as an opportunity to join the underlying bullish momentum, rather than trade against it.

The price has since traded through the upside targets and has now found resistance at the 49300 high. The Stochastic has moved out of overbought territory and is showing a bearish divergence with the price (red lines on price and indicator). These indications support the view of short term weakness. Again, using weakness to accumulate rather than trade against the longer term bullish momentum is the preferred swing trading methodology employed in this analysis.

The current retracement might offer an opportunity for long entry, although should the retracement deepen to close below 47100 the bullish momentum would be reassessed. Should gains resume before weakness extends (below 47100) the high at 49300 once again becomes the favoured upside target.

Click here to view South Africa 40 chart

Equities in focus

Foschini Group Ltd vs Truworths International Ltd

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 4.5%. A stop-loss would be considered equal to the anticipated gain of 4.5%.  

Click here to view the Foschini vs Truworths chart

Shoprite Holdings Ltd

The price of Shoprite looks to be reversing of trend line resistance (red line). Circled blue is a bearish engulfing candle pattern marking the price reversal. The parallel black lines mark a bear flag price formation. This pattern considers a weak move up after a strong move down, suggesting that the price momentum remains bearish.

The initial downside target favoured is located at support of the short term low at 14300. Should this level be broken, the bear flag projects a further downside target at 13820. A close above the high at 15450 would consider the failure of the bearish indications.   

Click here to view the Shoprite chart

Coronation Fund Managers Ltd

The share price of Coronation Fund Managers has broken out of an inverse head and shoulders formation (labelled L,H & R). The pattern suggests a short term bullish reversal of the recent downtrend. The height of the pattern, projected from the breakout level, finds a proportionate upside target at 7980.

A close below the right shoulder at 6720 would consider the failure of the bullish indication. 

Click here to view the Coronation 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 27/10/2015

Foschini vs Truworths chart

Source: ProRealTime charts, as of 27/10/2015

Shoprite chart

Source: ProRealTime charts, as of 27/10/2015

Coronation chart

Source: ProRealTime charts, as of 27/10/2015

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