South Africa 40 Cash Index price fails to break resistance following Fed comments

While yesterday (Tuesday 7 March 2023) we saw the South Africa 40 Cash Index testing an upside break of 72840 level, it was not to be. Instead, we saw the price rejecting the level as it sold off, a move which is being extended in early trade today.

In turn our long trade setup has failed to trigger, and we wait for a new opportunity to present itself.

In the short term, we now have a bearish engulfing price reversal (circled blue) from resistance and overbought territory. The yellow lines on the price and stochastic highlight a negative divergence as well.

These indications suggest some short-term weakness to follow, with 70700 the initial support target from the move.

The longer-term trend is however still considered up while the price trades firmly above the 200-day simple moving average (200MA) (blue line).

In lieu of this, we are still not looking to short a possible move lower. Instead, we are looking for a bullish price reversal at either the 70700-support level or 69240 support level for long entry. Alternatively, long entry would be considered on an upside break of the 72840-resistance level.

Reason for short term weakness

Risk off trade in global markets followed comments from Federal Reserve Chair Jerome Powell. Mr Powell noted that interest rates in the US are ‘likely to be higher than anticipated’ as economic data proves to be better than expected and the pace of disinflation appears to be slowing from what was witnessed late in 2022. The decidedly more hawkish commentary has seen the US dollar and US treasury yields rise while equity and commodity markets have started to sell off.

Statistics South Africa (StatsSA) also reported weaker than expected local GDP data on Wednesday, although the reaction from our local index was relatively muted.

Key economic data out this week

This week sees several macro catalysts that could in turn have a bearing on global sentiment and in turn the South Africa 40 Cash index. A summary of which is as follows:

• 5pm Wednesday, Fed Chair Jerome Powell testifies

• Friday, Bank of Japan (BOJ) monetary policy decision and statement

• 9am Friday, UK GDP

• 3:30pm Friday, US Non-Farm Payroll data, Unemployment Claims and Average hourly earnings

Client Sentiment

As of the 8^th of March 2023, most IG clients (66%) with open positions on the South Africa 40 Cash Index expect the price to fall in the near term.