A savage retreat, followed by a recovery, puts the JSE’s top 40 index at an inflection point.
The line chart below is showing some serious selling pressure, but this also presents what may be a “waterfall formation”, which refers to a sharp and fast drop in price, resembling water falling off a cliff.
The waterfall formation may be positive in time. That’s because such formations have the tendency to reverse quickly if momentum to the upside picks up.
We have tested a very important support line (line B, at 74,856 points) and we are currently trading just below a resistance, line A (at 75,987 points on the top 40 index). Take note that A and B are close to each other. This confirms the importance of this point on the chart.
Above line A we might see some buyers returning to the market. If we can regain some upward momentum we might reach for 77,239 points – the 40-week moving average – and even 78,536 in time to come.
Below line B the index may see lower levels, wipe the positivity away, and chase targets to the downside, from 74,745 on the top 40 all the way down to 72,394.
For investors: buy or consider a long above line A if you believe that we can regain some upward momentum following the waterfall formation, but use 75,134 points as stop loss to protect capital. The possible targets towards the top range from 76,080 to 78,536.
For medium- to long-term investors: keep in mind that the 40-week moving average (the red line) is a great barometer to measure investment sentiment. Above the average, investors are happy to invest, but below the average, investors will be nervous, so take note that the average is a resistance level.
This trading suggestion reflects the personal opinion of the writer and must not be taken as financial advice.
Frans de Klerk is an independent technical analyst.
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