As I emerge from the non-writing corner in which I have been hiding for the past few months, unease over the present state of the market compels me to issue a warning. Apart from the generally unpopular shenanigans of our government, he real threat of widespread civil disobedience over E-tolling urged me to me studying my charts. I number amongst those who hope that E-tolling will result in the downfall of the present government, in a similar way as the poll tax led to Maggie Thatcher’s departure. However, such an upset may adversely upset the blissful state of the market that we have enjoyed for the past few months.
This year’s high was reached in early November and charts lead me to expect a downward drift or even a plunge. The current support level of the JSE Overall index is around a twice-tested 44 000. If on the third testing it does not hold, we will receive an alarming down-count on its point-and-figure chart (not shown) to a hair-raising level of around 33 880.
You can see from the chart that such a fall would take the market below this year’s two lows reached in April and June. While I am not an avid believer in head and shoulders formations, assuming the April to June rise and fall is the left shoulder and the November high the head, the formation is two-thirds of its way through. To complete the formation we might expect a fall to around 37 800, which is the level of the neck, a rise and then a further drop. This is the pessimistic reading. Less so is to regard the August to September rise and fall as the left shoulder and the November high as the head. That would bring the neckline to a more acceptable level of around 42 700. I have drawn the two possible necklines in green.
Typically head and shoulders formations take time to complete, and so taking a shorter-term look at things, I have added a moving average convergence-divergence (MACD) plotting in red. MACD’s are an excellent method of timing the buying and selling of shares, indices and the rest. Buy signals come when the solid MACD crosses upwards through the dotted signal line, and vice-versa for sell signals. The latest sell single came on November 11 and the lines have since swiftly headed downwards. I have plotted the MACD’s dashed 0 line to show that both the solid and dotted lines have now dropped below the zero level into negative territory.
Other charts of the JSE-Overall index are also discouraging. On its price chart, the short-term moving average has just fallen through its medium-term moving average, and if it continues falling, a new bear trend will be indicated. Its stochastic indicator is fast approaching 40; its relative strength indicators at below 45; and it is fast approaching -2 on its overbought/oversold indicator.
Not for one moment am I suggesting that you liquidate your portfolio, but if you are heading to the beach for Christmas, I suggest you study your portfolio and consider liquidating those shorter-term holdings that you bought for speculation.