Welcome to TheMarket.co.za Weekly Analysis Report
Date of Issue: 06July2016
By Colin Abrams
Classic Trading Rule:”Do more of what is working for you and less of what is not.”
REVERSING DOWN, BUT WILL IT LAST?
Introduction:
After an extremely sharp rebound rally on world stock markets, which for the most part led to false breakdowns on the Brexit result, stocks have reversed down again. The recentvolatility in both directions in almost unprecedented. As far as the JSE All Share index is concerned, it is making lower highs and lower lows and this is still bearish, until provenotherwise. The current sell-off in the S&P 500 (which started last Friday night when it closed well of its high), will be crucial in assessing if we’re going right back down again i.e. to the post Brexit lows and lower, or not. Trading the US indices right now is dangerous.
Starting with the chart of the S&P 500 as usual, some clear profit taking levels for now on shorts are shown on its chart. But it’s generally range bound med-term. We then show a chart of London’s FTSE-100 which gave an important upside breakout recently, but whether that has follow through remains to be seen. Right now it’spulling back. The JSE All Share index is approaching some short-term support right now as it drops sharply again. If it breaks downthrough it, we could be in for some larger dropping. We then look at the GBP/ZAR, with the recent decline in the Pound likely to continue for a while longer. The stock charts looked at are Fambrands(new upside breakouts), Angloplat (breaking out today), and Aspen (overbought now, but med-term very bullish).
The small-cap chart is Adcorp, that has given a nice upside breakouts for buying.
Overall, this is the most dangerous market I've seen for a long time. Not just because we’ve had some steep drops, but because the rebounds (up) have been equally as sharp. This type of market is an intraday traders’ delight. But on a short-term end-of-day basis it makes trading difficult. A number of false breakouts have occurred recently due to this. One has to keep stops very tight because of this. But right now the short side is favoured again.
Executive Summary:- S&P500 (chart 1):Sell short at current levels, with great caution.
- FTSE-100: (chart 2):Buy if it trades back above 6612. But a reversal week down is shortable
- All ShareInx (chart 3):Hold current short trade, with a tightened stop
- GBP/ZAR (chart 4): Go long the rand/sell short the GBP on a bounce to the 20.10 level
- Fambrands(chart 5):Buy on the next positive (up) close
- Angloplat(chart 6):Buy at current levels
- Aspen(chart 7):Buy on a correction to R341 level
- Adcorp(chart 8):Buy at current levels or better.
- Leading Stocks (3-mths): Top 40 – Anggold, Anglo, Mr-Price, Aspen, BHPBilliton, MTN, Tigbrands
- Shortable stocks/instruments: 26
1. MARKET CHARTS
S&P 500 INDEX –Reverses off resistance
Broad Recommendation: SELL SHORT (AGGRESSIVE TRADERS ONLY)
Current Trend:Sideways on all main timeframes.
Strategy:Sell short at current levels, with great caution.
Chart 1. (Daily)
Chart Setup: The S&P and other US indices have givenfalse breakdowns following the Brexit result and reversed back up sharply. We are unfortunately in a volatileenvironment where false breakouts are more common. Right now it’sreversingdown from line 6, and is likely to drop further.
- Its short-term Stochastic (on top) has reached an overbought level, so more downside is likely.
Strategy Details: Aggressive traders can sell it short at current levels, but with cation.
Target: While there is no specific target being shown, take partial profits at 2050. Take more at 2038 (just above line 2). There is potential for it to retest last weeks 1991 low (although there's nothing pointing to there right now).
- To the upside, there is still a lot of resistance, at lines 6 (2108), 4 (2117), and 5 (2134). Therefore, it has a lot of work to do if it’s going to break out.
Stop-loss:For shots it’s an intraday break of Friday’s high of 2109. From 2050 use a breaking of its prior two-day high as the stop, then prior one-day high from 2042.
FTSE-100 INDEX – Will this breakout hold?
Broad Recommendation:POTENTIAL BUY SETUP
Current Trend:Short-term up. Med-term sideways to up. Long-term sideways.
Strategy:Buy if it trades back above 6612. But a reversal week down is shortable.
Chart 2. (Daily)
Chart Setup: London’sfootsie has seen a massive rally post the initial Brexit sell-off. A prior head and shoulders (labelled in grey) did not reach its downside target. The index has now broken you above line 1 (see circle) to confirm a large inverse head and shoulders. There is a significantly higher target in place, but one has to be extremely cautious in the current market environment. It is pulling back right now.
- Its short-term Stochastic (on top) is overbought, so a pullback is to be expected.
Strategy Details: The questions is whether this breakout is a false one or not. So to be more sure, wait for an intraday close move back above Mondays high (6612) before buying. However, if we get a reversal week down by this Friday, sell short. (That will point to the breakout as having been a false one).
Target:To the upside, technically to 7540, based on the height of the larger inverse H/Sh projected up. But line 2 resistance come in before then at the 7450 level, which is the recommended target. Take at least half profits near its 2015 all time highs (7100). If it gives a reversal wee down for shorting, take some shorting profits at 6205, and the rest at 6120.
Stop-loss: A close below 6400. Once it gets to 6800 bring the stop up to breakeven (your entry). From 7000 raise the stop to a breaking of its prior two-day low. For a short trade, it’s above the recent high of 6612.13. Then use a breaking of its prior two day high from 6205.
JSE ALL SHARE INDEX–Lower target still intact [Signals done on alsi future]
Broad Recommendation: HOLD SHORT (WITH CAUTION)
Current Trend:Short-term down, despite recent rally. Med-term sideways. Long-term sideways.
Strategy:Hold current short trade, with a tightened stop.
Chart 3. (Daily)
Chart Setup:The index had a very sharp rebound but did not trigger the stop on the current short trade. On Monday it gave a bearish reversal candle (a ‘shooting star’) and from its 50-day moving ave, and is fallingheavilyfrom there. So, despite the current volatility in both directions,it’snoteworthy that the index is making lower highs and lower lows for now. Overall, this is adifficult index to trade right now, because of the sharp moves. But the bias is still to the short side.
- Its Stochastic (on top) is providing no real clues right now.
Strategy Details: Hold the current short trade, but with caution. Use a breaking of its prior two-day high as the stop.
Target:Technically there is still a lower target in place from a broadeningformation formed by lines 2 and 3, to 47900. I’m a bit sceptical of it given the recent rally though. I would suggest exiting at least half the short position at 50200.
- To the upside, resistance is line 6 (currently53400). Then 54760 (line 4). There is a lot of resistance up there.
Stop-loss: Use a breaking of its prior two-day high as the current stop. From 51 300 (line 1) lower the stop to a breaking of its prior one-day high.
GBP/ZAR – Pound on ongoingweakening path
Broad Recommendation: LOOK TO BUY RAND/SHORT POUND
Current Trend:Short- and med-term rand strength. Long-term rand weakness.
Strategy:Go long the rand/sell short the GBP on a bounce to the 20.10 level.
Chart 4. (Daily)
Chart Setup: The GBP/ZAR has formed a large head and shoulders and broke down sharply below its neckline after the Brexit result. There is still a significantly lower target here (rand strength).
- But right now the currency is oversold, and is giving a positive divergence (see Glossary). This is warning of a (temporary) pound rally to come.
Strategy Details: Look to sell short this currency cross, i.e. long the rand/short the GBP on a short-term rally closer to line 1 e.g. from the 20.10 level (on a reversal day/candle down).
Target: Downside target to 16.70 i.e. the height of the large H/Sh projected down. There is a prior support zone at line/s 2 (17.25-17.00) where one should take profits if reached. Whether it gets down to there or not remains to be seen. Take some partial short-term profits at 18.50 on the way down.
Stop-loss: Initial stop is a close above 20.60. From 18.50 lower the stop to a breaking of its prior three-day high. Bounces will remain shortable (i.e. long the rand) until the downside target is reached.
FAMBRANDS (FBR) – Two upside breakouts
Broad Recommendation: BUY
Current Trend:Short and med-term up. Long-term sideways.
Strategy: Buy on the next positive (up) close.
Chart 5. (Daily)
Chart Setup: Fambrands has broken out of two channels. The larger one is formed by lines 1 and 2; and a smallerone by(part of) line 2 and line 4. There are two higher targets pointing to similar levels.
- Its short-term Stochastic (on top) is entering its overbought level, and the price is pullingback today (Weds) so far. It can pull back a bit more in the immediate short-term.
Strategy Details: Buy it on the next positive i.e. up closing price.
Target: T1 is R136, based on channel 1-2 projected up. T2 is R135.50, based on the smaller channel. Take trading profits at R135.50. (Or if preferred, take half profits there and leave some on for a potential move to retest its Nov highs at R141).
Stop-loss: A closebelow line 2 (R121.00). From R133, bring your stop up to breakeven (yourentry price).And from R134 use a breaking of its prior one-day low as the stop.
ANGLOPLAT (AMS) – Attempting a new breakout
Broad Recommendation: BUY
Current Trend:Short-term up. Med-term sideways. Long-term up.
Strategy: Buy at current levels.
Chart 6. (Daily)
Chart Setup:Angloplatinitially broke down below line 1 of a symmetricaltriangle (with line 2). It’srallied over the past week triggering the stop for shorts from that breakdown. (There have been a lot of false breakouts in recent weeks, testimony to the greatvolatility at present). It has now broken out above line 2, and today so far is breaking above line 3 resistance.
- Its short-termStochastic is entering its overbought region, but because the price is breaking out of a large pattern, it’s likely or remain overbought for a good while (certainly if this new trend continues). Its weekly Stochastic (to shown) is relativelyoversold, which is bullish.
Strategy Details: Go long (buy) on a close above line 3 (R401.85) which is on the cards for today.
Target: Minimum target up to R458 i.e. the height of the triangle projected up. Take at least half profits there. Further potential is to R463.
Stop-loss: Initial stop is a close below R385. From R427 raise the stop to a close below R400. And from R449 raise the stop to a breaking of its prior one-day low. (Take at least half profits at R458 as mentioned).
ASPEN (APN) – Overbought right now, but overall very positive
Broad Recommendation: BUY ON A CORRECTION
Current Trend:Short-term up, but overbought. Med-term up. Long-term turning up again.
Strategy: Buy on a correction to R341 level.
Chart 7. (Daily)
Chart Setup: I've been very bullish on Aspen in recent weeks for the med-term, and the above chart shows why. The price has formed a very large inverse head and shoulders (S-H-S). It broke out above the neckline (line 1) on the 9th June.
- Its short-termStochastic (on top) however is overbought and giving a negative divergence, warning of a correction to come. It’sdropping today so far, after giving a bearishreversalcandle on Tuesday. It’s likely to correct further before heading up again.
Strategy Details: Look to buy on more of a correction, as part of a med-term trade. Look for a reversal day/candle up from the R341 level to buy (med-term).
- Note, in the immediate short-term aggressive traders can sell it short, for a temporary ‘mean-reversion’ trade. But with caution, and know that it’s risky because it’s a strong stock.
Target: Med-term+ up to R477 i.e. the height of the large inverse H/Sh projected up. In the immediate short-term however, the first level of support is at line 1 (R345.70). (Traders selling short to take profits there). But generally, it can pullback to the R341 level. Andmaybe further if world markets sell-off sharply into October e.g. to line 2 at R296. Any significant weakness below the R341 level will be a chance for med-term players to add to long positions.
Stop-loss: As part of a med-term trade, keep the stop wide for now, as a close below line 2 (below R294). Aggressive traders selling short now, the stop is a breaking of its prior two-day high, then prior one-day high from R352.80.
2. SMALL-CAP. CHART
ADCORP(ADR) –Bullish breakout
Broad Recommendation: BUY
Current Trend:Short-term up. Med-term sideways to up. Long-term technically still down.
Strategy: Buy at current levels or better.
Chart 8. (Daily)
Sector:EducationPrice: R20.54
Chart Setup: Adcorp has broken out of a med-term inverse H/Sh. It still has a good way to go before reaching its target.
- Its short-term Stochastic (on top) is overbought, so we might get a minor pullback.
Strategy Details: Buy at current levels. Add to it if we get a pullbacke.g. to R17.40.
Target: Minimum target up to R24.75 i.e. the height of the inverse H/Sh projected up. Take partial profits at R24.00.
Stop-loss: A close below line 2 support i.e. below R17.25. Once it trades up to R21.50 rising stop to a close below R17.70 (line 1). And from R24 raise the stop to a breaking of its prior two-day low.
Other small-caps of interest (alphabetically):(shares to consider on a pullback)
- Alaris, Cartrack, Huge, ISA, RBPlat, RCL, Rhodes, SA-Corp.
3. RELATIVE STRENGTH
These are the strongest index stocks on a 3-month basis relative to the JSE All Share Index.
Typically the leading stocks keep leading. Therefore, traders can buy these stocks on pullbacks, although always look at the chart first before making a decision. Medium and longer-term players should look to buy them when they first appear on this list.
We've also included the weakest index stocks. These can either be shorted on bounces (if in a downtrend), or traded as a "pairs trade" against the strongest stocks i.e. go long a strong stock, and sell short a weak stock at the same time.
Strongest seven Top 40 stocks:Anggold, Anglo, Mr-Price, Aspen, BHPBilliton, MTN, Tigbrands.
Weakest seven Top 40 stocks:Capco, ItuPlc, Investec, Brait, Stein-NV, Netcare, Richemont.
Strongest five Resi 10stocks:Anggold, Gfields Anglo, Implats, BHPBilliton.
Resi 10 vs. Findi 30 over 3-months: Resi 10 is stronger.
4. NOTES & UPDATES: - Concerning last newsletter’s index stockcharts:
-Kumba-IO:had a very good run, stopping just short of the 120.60 target so far. Its prior two day low stop activated to lock in a nice profit. I still like the look of its chart however, so look to re-enter (buy) on an intraday break above 116.55. Stop will be below the low of the pullback of the past few days. Target 126.50-130.
-Sanlam:after an initial bounce followed by a few reversal candles down, this stock is falling nicely for this short trade.It’s a hold still. Target is down to R51.75 Take partial profits at R53.50 though. Stop is a close above 59.70 .From 55 lower the stop to a breaking of its prior two-day high. Then prior one-day high from R53.50 (and take half profits there).
-Naspers-N: It had a good initial rally and is now pulling back sharply. The stop was a prior two day low from the start, which activated yesterday to lock in a small profit. It’s looking weak right now but has some support at 2100. More solid support (line 1 shown last week) is at 2075. If it gives a reversal day up from there it will be buyable again. With the stop a close below 2065.
Other recommendations and index stocks of interest (alphabetical order):
Important Notice: When buying after a pullback or selling short after a bounce, always look for a sign of a reversal e.g. reversal day or reversal candle before entering (otherwise one is simply picking a top/bottom, which does not work). A reversal day/candle at the top is typically when the price rallies that day but then sells off to close near the bottom of the day’s range. Conversely, a reversal day/candle at the bottom is when the price initially drops that day, but then rallies back to close near the top of the day’s range. Waiting for the reversal day will put the odds back in your favour. (I usually like to see the high/low of the reversal day taken out the next day before finally entering i.e. the entry ‘trigger’).
-Regarding taking profits, I suggest locking in profits in thirds as the price moves in your favour i.e. 1/3 of your position, then another third then the final third.
High probability trades (or charts),other than Charts 5, 6, and 7, that I particularly like (long or short) at the moment (in no particular order. See comments below):
-SABMiller, Growpnt, Capitec, Gfields, Medclin, Implats, Tigbrands.
-Anggold: a lovely trade here as it reached its 295 minimum target today. It can still make it to 318. If you're still holding some use a prior one day low as a trailing stop.
-Angloplat: see Chart 6.
-Anglo: as we mentioned last week, the prior breakdown had good chance of being a false one, and the stock rallied to trigger its stop. It’s now reversing down again. It will probably drop to the 132.50 level, but its very range bound overall. It needs to close above 151.70 to give a buy signal. That will setup a target to 176.50. Stop a close below 145.50. But right now it looks vulnerable to a drop to 132.50/131.50. There is more support at the 125 level after that. If you want to attempt an aggressive short use a prior one day high as the stop.