SA40 Cash Index: What next?

The below analysis is a reconcilliation of what the technical analysis indications are suggesting for the South Africa 40 Cash Index.

Price and volume trends negative

The 10, 20 and 50-day simple moving averages (10MA, 20MA and 50MA) highlight the obvious short to medium term downtrend in play on the South Africa 40 Cash Index.

The rising volume accompanying the price decline (marked with the dotted trend lines is a suggestion that the downward trend has further sustainability.

Volume spike a selling climax?

The unusually high volume marked with the red circle is often referred to as a ‘selling climax’ in technical analysis terms. A selling climax suggests an end to the initial wave of selling and possible rebound to follow.

Stochastic oversold

The stochastic oscillator has been trading in oversold territory for a prolonged period. This is also a suggestion that the aggressive move lower might have capitulated in the near term.

Bullish candlestick reversal pattern

The candle market with the black arrow is known as a hammer. This candle shows an intraday price reversal also warning that the downtrend may have found a near term end and could be setting up for a short term rebound.

Retracement levels and considerations

The volume spike, oversold signal and bullish candle stick reversal pattern, suggest that there could be a rebound from the downtrend currently in place.

A rebound would be considered a pullback or retracement of the longer-term downtrend.

As a function of the downtrend (marked with the dotted trend line) we have highlighted retracement or pullback areas to help us assess what our next actions may be.

A pullback towards the 20% to 33% retracement levels (36 000 to 38 850) would be considered a shallow retracement. Should the rebound start to lose momentum in this area and form a bearish price reversal, this would be considered very bearish for the index and target a move through the recent low at 31800. A shallow retracement is a suggestion that sellers are eager to get out of or short the market, allowing little time for the index to rise.

Should the pullback move the index past the 33% retracement level and closer towards the 50% retracement area at 42000, this would be considered a normal pullback. In this scenario the pullback would have erased less than half of the decline lower. This would still consider the downtrend to be well in play and a bearish price reversal would once again consider selling or short selling into the index with the low at 51800 the support target.

Should a pullback move the index above the 50% retracement level at 42000, this could be an indication that the downtrend has lost significant momentum and could be reversing. In this scenario, the index would have erased more than half of the move lower. At this point we may consider the downtrend to be broken and start assessing the merits of new long positions on the index.

Alternate Scenario

Should a rebound not ensue the downtrend is noted as continuing when the low at 51800 is taken out.

Key message

The downtrend on the South Africa 40 Cash Index remains prevalent, although there are indications that a short term rebound could ensue. The rebound is a suggestion to exit short positions and realise profits, but not yet an indication to go long against the prevailing trend. Instead we are looking to the rebound as new short opportunities, provided that the rebound does not take us past the 50% / 42 000 level.

If the rebound does bring us back past the 50% level then we would reassess the merits of now looking for a long bias to trades once again.