The recent rally has largely been driven by the monster resources run. The rising tide has lifted most boats and we have seen a broad based advance across our market. Some stocks have seemingly inexplicably moved higher and higher and many shorts have been squeezed out of the market.
Last week I wrote a piece on how I think US stocks could be topping out at current levels and today I have looked a little closer to home as |I search for clues as to where our market may be heading.
Today I turn my attention to our largest index, the J211 (JSE Industrials).
The index has enjoyed a strong run as our market pushed higher but the short term daily chart may just be telling us that the party is over…
Last week’s rally was weak
The daily chart is where I have been searching for clues of momentum and let’s be honest, the rally has been extremely strong in the sector. Some might even say too strong.
My momentum indicators at the top of the chart have started to indicate that there is some selling taking place across the index as a whole.
The relative strength indicator has also started moving south and currently below the 50% mark, we could see “profit taking” commence in earnest.
The stochastics have begun the decent out of over-bought levels, and this indicates to me that last week’s rally that pushes us higher was actually quite a weak one.
Short term downward break
Last week also saw the index break below it’s 21 day moving average which is a sign that the last “rally” was less sustainable than first thought. This break lower should be interpreted as bearish because each time this has happened so far this year, the next sell off was significant.
The break this time though could be much bigger and take us much lower…
A bearish Head and Shoulders
This time around, the break of the 21 day moving average has helped to form the right shoulder of a bearish head and shoulders pattern.
The weaker right shoulder is text book for this pattern.
The next thing to look out for is the break of the neckline of this pattern.
I have pegged the neckline support at around 70370 for the Index. Our Industrials index is currently trading around 69700 so it looks to me like the neckline has been breached and this bearish pattern looks to be confirmed.
Should the head and shoulders complete, we could see a sharp move. I suspect the index could make a move down to around 67000. That relates to a 5% correction. That is quite significant in my view.
How do you trade it?
When trading a head and shoulders pattern such as this, one would normally wait for the neckline to be “re-tested” and then enter the short trade.
There are many ways to trade this move on the index.
From trading the index heavy weights like Naspers , SAB and MTN to simply shorting the basket satrix industrials ETF.
I prefer to trade CFD’s when going short to take advantage of the gearing they offer and because they are a lower cost instrument. Should you have a SAFEX account you are also able to trade on exchange by utilising Single stock futures and e-CFDs.
As usual, I am more than happy to talk you through the process so drop me a mail or book a chat for any questions you may have.
Here’s to profitable trading,