Again, it’s hard to form a strong opinion on what is most likely to be the overall theme for the week ahead. The coronavirus is a serious issue and is impacting global markets and sentiment.
On the one side, we see China implementing all sorts of supportive measures like; encouraging bond issues by top tier companies to help them battle the impact of the virus, issuing guarantees to medical manufacturing companies that government will buy any excess stock of masks and related goods thus encouraging these companies to manufacture as much as they can (there is a shortage), cutting electricity costs by 30% to medical manufacturers, lowering water and electricity prices to entire provinces that are affected, providing somewhere around 71.8 bln Yuan of financial support to affected areas, the list goes on. We get the sense that the Chinese government is doing everything they can to prevent the economy coming to a grinding halt.
On the other hand (insert Naas Botha joke here); 23 airlines are no longer flying to China, cities of millions of people look like ghost towns, the Chinese government is encouraging people to go back to work on Monday in order for vital food and medical goods production to resume although for the most part not many are expected back at work until the 15th, international businesses are extending store closures the country over, schools are being closed until March, one of the world’s biggest vehicle manufacturers (in Europe) have said that unless China goes back to business as usual within the next two weeks they will have to stop production (a Korean manufacturer has already shut down), and the list goes on.
The situation is confusing and scary. This is forcing money back into the the U.S. in a search for safety. Markets bounced back last week though, likely on the back of some of the above supportive measures mentioned, but also on the back of mostly dovish central banks in the U.S. and EU. Quantitative Easing in Europe, a number of interest rate cuts expected in the U.S., the good old ‘free money forever’ cocktail always soothes the nerves. At least for the developed markets. Locally we saw the Rand come under pressure and close the week above R15 to the Dollar. Also, commodities came under pressure, notably Crude Oil, Copper and Iron Ore. We wonder if the global market bounce back we saw last week will continue this week.
It seems that the shorter-term down trend has been broken with the R14.50 key level being broken convincingly. Our expectation is that we see the Rand trade higher to resistance levels last tested in November, October and August 2019. We imagine that should a move toward the R15.49 level take place, local stocks will come under some pressure. We’re not sure that a weaker Rand will help the traditional dual listed stocks as many of them are in the resources space (with one in luxury goods, which is also severely impacted by the coronavirus). Thus we think that the weaker Rand effect will be nullified by weaker commodities prices in general.
Vodacom has some woes, namely legislative pressure to reduce data costs. We’ll leave the back of the matchbox calculations out for now and focus on the technical setup. Our traders are looking at a bear flag formation which would trigger a short on a daily close below R115.00. The stop loss would be above R122.50 with a target price of R98.00. We like the 2:2.27 Risk-Reward and will be awaiting confirmation before making any moves.
The long-term trend in Cable (GBP/USD) is down. Our traders picked up a short-term topping pattern (Head and Shoulders) which appears to have triggered a short trade to the 1.23304 level. Should the longer-term trend remain in place here, we would actually expect that the lows around 1.20000 are taken out in the coming months and for the long-term downtrend to remain in tact.
This is a rather high risk call to make, but we are seeing a number of worrying signs emerging from the Palladium market. First of all, the rally thus far has been driven on the back of a supply side constraint. In other words, demand from automakers has just been higher than what the market has been able to supply. Thus, prices kept flying higher. A key risk here was that automakers switch from Palladium to Platinum as the input for catalytic converters. Now though, the coronavirus is taking its toll on auto manufacturers. Kia (in Korea) has already shut its factories down, and Fiat has warned that if the virus situation does not improve soon, they will have to shut down their plants in Europe as well. Thus, the demand that has been driving Palladium to the moon seems to be fading away. Also, odds are good that these factories will switch out the Palladium production lines for Platinum ones while they are not operational. So could that be it… the top of Palladium?
From a chart perspective, we note “The Eye of Sauron” formation (actually just a lower high, but “The Eye of Sauron” sounds cool, so we’re going with it). If you compare this formation to the top of the Bitcoin chart at $20k… or any other bubble chart for that matter, you’ll notice that it is a rather reliable topping pattern. We’d like to see the recent low of $2151.20 be taken out on a daily basis before we will be fully convinced that a larger scale pull-back is unavoidable.
We tried a few shorts in the platinum/palladium sector last week. Some were spectacularly unsuccessful, some are hedged and some more are on the cards if the above setup does in fact play out the way we expect it should. This is something that we will be keeping a very close eye on. You could even say that we’ll be ever watching, with a lidless eye wreathed in fire!
Given the risk-off context of the overall market and the expected influence that will have over the Rand, our traders are looking for signs of weakness in the retailers sector. CLS appears to be presenting a decent short setup. First a fake breakout from a Flat Top Triangle, then a bearish break and retest of the resistance/support. We also note that even though the general belief around flat top triangle formations is that they are trend continuation patterns, they are in fact bilateral formations. In other words, they can break in either direction, with or against the trend. Our traders are looking for targets at R230.00 and a potential gap close at R218.38. We like the high Risk-Reward that this trade offers.
Netcare – added after posting
We noticed that some of you were looking for the NTC tag to look at the old setup. Here are some new charts 🙂
Above: longer-term downtrend will provide resistance, although the stock has entered into a relative outperformance phase.
Below: Inverse Head and Shoulders reversal pattern into a Symmetrical Triangle, aiming for long-term downtrend line.
Thanks for reading guys!
*Please note that these trade ideas for part of a larger weekly plan and the value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. The risk of loss arising from trading in Contracts for Difference can be substantial. You should carefully consider whether such investments are suitable for you in the light of your circumstances and financial resources.