Anyone with even a passing interest in equity markets will be aware that the JSE is currently at levels never seen before.
The FTSE/JSE All Share Index went beyond 50 000 for the first time last month and the FTSE/JSE Top 40 Index made its first foray above 46 000 earlier this week.
While these record levels may sound great if you have money in the stock market, they have also made many people wonder how long this can continue. With each new high reached, the threat of a market downturn seems to grow.
But rather than just speculating about the state the market, it’s worth looking at a technical analysis that can shed more light on the territory in which the JSE is trading. And what this shows is that there is good news, and bad news.
“Historically, June is regarded as the most under-performing month of the year,” says technical analyst at Nedbank Capital Peet Serfontein. “Therefore a market correction remains high on the radar screen.”
Serfontein says that looking at the market in rand terms, there are two clear warning signs. And these show up whether you are looking over short (seven days), medium (21 days) or long term (75 days) time frequencies.
The first is that the Alsi is trading above the upper Bollinger Band. This is the band placed two standard deviations away from a moving average to show a normal trading range. Going above this level means that a pullback is highly likely.
The second indicator is that the Alsi is trading beyond the relative strength index (RSI) level of 70. RSI compares the magnitude of recent gains to recent losses and any reading above the 70 level shows an overvalued asset and that a correction is most likely due.
“A change in the short term trend will be a trigger for a break below 49 800,” Serfontein says. “There are similar triggers in the medium term trend at 49 400 and long term trend at 46 650.”
However, even if the Alsi falls as low as 46 650, Serfontein says he wouldn’t yet consider that a bear market.
“The 200-day psychological level is at 46 132,” he explains. “So we can easily see the market correcting 9% before psychology will view it as bearish.”
Serfontein suggests that the long term trend line does however look too steep, and a more realistic number is around the 47 600 level.
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