South Africa 40 Cash Index price forecast: overbought but trend bias is up

What do the indicators suggest for the South Africa 40 Cash Index?

The 20 (red), 50 (green) and 200 (blue) day simple moving averages (MAs) suggest that the short, medium, and longer-term trends for the South Africa 40 Cash Index are up at present. This is gauged by price trading above the 20MA which trades above the 50MA which in turn trades above the 200MA.

In lieu of this, trend followers might then prefer keeping a long bias to trades, although might not be comfortable to find entry at current levels due to the overbought signal on the Stochastic oscillator.

As the overbought suggests the price may need a correction or consolidation from current levels, a preferred approach may be to look for long entry (in line with the trend bias) on price pullback from overbought territory.

Assessing price action on the South Africa 40 Cash Index

The South Africa 40 Cash Index price has now extended a move into new all-time high territory. As the price trades into this new high territory, we are using a confluence of channel resistance (shaded red) as well as a 61.8% Fibonacci extension, for a ‘longer’ term price target of 74600 for the local index.

Buying into current strength poses a greater risk relative to reward assumption in lieu of the eight days of consecutive gains and overbought conditions. The upward trend bias also suggests that looking to try pick tops and taking a contrarian ‘short’ position also carries an elevated degree of risk as it is against the prevailing market momentum.

Ideally, we would like to see a consolidation or price pullback before looking for long entry. In the event of a pullback or near-term correction we would look for evidence that a counter trend move is complete with a bullish price reversal i.e. a bullish candle pattern or tick back in price, before trying to get long on the index.

In this scenario the labelled resistance levels on our chart would provide upside resistance targets for the trade, while a close below either the reversal low or channel support (dotted or solid line) could be used as a stop loss indication.

Should a correction from overbought territory ensue, not end with a bullish price reversal and instead move the price to close below the support low at 65680, only then would we look to reassess our long trend bias currently assumed on the South Africa 40 Cash Index.

Inflation data a key near term market catalyst

Today’s (Thursday 12 January 2023) US CPI (Consumer Price Index) inflation data is likely to be a key data point for short term direction on global markets, including our local index. Consensus estimates suggest a year on year rise of 6.5% for US CPI. A reading higher than this consensus figure could be a catalyst for a short-term pullback / correction on the index, while a lower-than-expected reading could see short term gains extended.