Is the SA40 Cash Index finally setting up for a committed trend reversal?

The index is starting to give some clues that the selling momentum we have seen as of late, might be starting to lose its momentum.

SA40 22 11 2016

In the last guidance via the Technical Tuesday newsletter, we were looking for a mean reversion trade scenario, waiting for a price break of the lower Bollinger band to afford a long entry opportunity. Although not the conventional use of a Bollinger band this had proven an effective strategy as of late and is highlighted by the blue circles. The price did not break the lower Bollinger band to afford the guided entry opportunity, but managed to reverse before breaching the indicator (circled red). This could be an early warning of a larger double bottom reversal pattern forming (not yet completed). The fact that the previous move down had enough force to break the lower Bollinger, while the last move lower did not, adds credence to the view that the selling momentum may be subsiding. For the bullish reversal to confirm and for us to revert back to a breakout and trend following trade view, we would like the double bottom pattern (blue “W” on chart) to confirm with a close above the horizontal black trend line. Because we have had numerous false breakouts recently, a break above the upper Bollinger band is used for further confirmation. Should the move up occur with enough force to break the upper Bollinger band, it would show considerable buying momentum as previous short term highs have failed to breach the upper Bollinger. Failing this break out scenario, the mean reversion strategy would be maintained ahead of a trend following system. 

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain 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 this information. Consequently any person acting on it does so entirely at their own risk. Any research provided 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. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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