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Trade insight example

Sasol Ltd

13 January 2015 

The burning question on most people’s minds at the moment is centered on where the bottom of oil might be. The recent report by Goldman Sachs which points toward a “U-shaped” oil recovery taking longer to recover over an extended period of time has caused further panic selling, driving down the price of WTI and Brent Crude to almost 6 year lows.

Sasol has lost over 41% in its share price value, trading well below its 200day moving average (red line) in what is a very strong downward trend. Technical traders in hindsight may be looking back and noting the Death Cross (50 day MA crossing 200day MA) that took place in November, signaling further downside. This pattern can be unreliable and very few would have expected Sasol to be trading at 38105c two months later. The current share price was last seen at this level in April 2013. 

Sasol Ltd, 13/01/2015

Arguably some might be looking at the share price reaction and thinking it is overcooked. The Rand has weakened (evident in the chart below) driving earnings from offshore revenue up and Sasol’s Synfuel operation has been delivering good results.

The only real concern from a company point of view is the recent Capex of $20 billion into a Louisiana shale fracking project, expanding its existing facility at Lake Charles. Given the concerns around the price war now evident in the Oil space and the efforts by the likes of OPEC to drive fracking operators out of the market by creating a glut in supply, this timing of expenditure and the drop in Oil prices and not the Oil price alone may clearly be enough to spook investors.

It is interesting to note that Brent was more than double the current price the last time Sasol shares were at this value.

Brent Crude Oil, 13/01/2015

Picking a bottom on Sasol may be at best a foolish idea, even though the value players may be queueing up to already start averaging in and taking advantage. The concern is that the share has continued to make fresh lows and it does not seem as though it has found strong enough support as yet.

The trading range may be between 37000c and 43600c with the relevant levels of support and resistance in-between outlined below. The share is oversold on the RSI, however shares can remain this way for extended periods of time.

Volume has been strong on the downside, what is alarming is the lack of volume in the recent rally back above 43600c, citing a lack of conviction from Bulls. Sasol is a strong company and some may feel it is a victim of circumstance in current conditions, and undeservingly so.

Range trading opportunities exist but caution should be exercised due to the fickle nature of the market, especially around commodities. A strong trend reversal pattern and higher lows on the share price will be signals that technical traders will be looking at for any kind of potential bottoms. An increase in the oil price will improve investor sentiment and ultimately aid the share price. Perhaps a hold or delay in the Louisiana fracking project would be prudent for Sasol given the current market conditions. - Leigh Riley, Premium Client Manager

Sasol, 13/01/2015

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