Weekly game plan 16 February 2020

May you live in interesting times… honestly we cannot get our heads around how the U.S. market is trading at all-time highs while the situation in China is getting worse and worse each day. It just feels like the entire world is actively choosing to not believe that anything really bad is happening there. We’ve put a lot of thought into what our view needs to be on this topic and it is our feeling that we would rather be “the boy who cried wolf”, and thus make a few errors in an attempt to be extra-careful, before we join the rest of the crowd and just pretend that nothing is wrong. We would rather pay opportunity cost than be caught by surprise. Maybe making a big noise about the coronavirus outbreak is the wrong play, but we’d rather be labeled fools than be sorry we weren’t careful.

That said, it’s up to the power of good old technical analysis to give us the lay of the land and the game plan for the week.

S&P500

Maybe we’re trying too hard to see our own bias here… that is very possible and we have to stay open to the possibility of being proved wrong. Thus there is no real trade idea behind this, but we are observing this market rather closely. The chart below shows what we thought was a break of the short-term trend line, that turned out to be fake break. Now we see a hanging man candle formation, which again is a bearish signal. We also note that there is bearish divergence between price and the RSI oscillator.

Palladium

Well, the halflings have made it to Mount Doom it seems… for the Eye of Sauron has been vanquished. This setup is starting to look like a pennant / symmetrical triangle setup. Technically speaking, a pennant is a trend continuation pattern, so maybe the face ripping rally in Palladium is not yet done? As was the case last week, there are no triggers for this setup just yet, but we’re paying attention.

Kumba Iron Ore

So the disclaimer here is that the coronavirus poses a huge threat to the commodities market and that if sentiment shifts, everything can change very quickly. But… that is what stop losses are for isn’t it?

There is a ABC pattern, or bear flag pointing lower (link to that setup here) which we looked at before. We are not dismissing that trade setup, but we are acknowledging that we could see a bounce off the longer-term trend line here. We see one of two high probability scenarios unfolding. Either; 1. the trend-line holds and the bear flag is invalidated or, 2. the trend line creates a bounce to the R400 region (which will give us the entry for the original trade plan) before retesting and pushing through the trend-line.

We also note that, as indicated by the light blue blocks, that there are similarities in price action and momentum around the long-term trend line when compared to the last time that price was testing the trend. We also note that we have 3 of 6 long triggers on the daily timeframe. If the new week offers us a good risk-reward opportunity to go long, we will very likely back that trade idea – at least to overhead resistance at around R400 and maybe R440. Note that a break above that R440 resistance level would invalidate the bearish flag formation. We would like the option to be onboard for the long trade in the event of that the bearish setup is invalidated and thus are on the lookout for a good setup.

All that said, as stated in the previous post about this setup, a failure of the trend-line will override any bullish ideas here. Fact of the matter is that the relative strength setup on this stock still requires a overall bearish bias. Let’s give it a few days and see what happens.

Reinet

We’ve been bullish on RNI in the past, but this time around we’re not too worried about the technical setup. We do note that there is a small bullish pennant (trend continuation pattern) present and that it appears to have broken to the upside. We also note that RNI has recently broken out and started outperforming BTI (British American Tobacco). As surely many readers know, RNI holds a large amount of BTI shares and thus has a very high correlation to BTI. We’ve noticed that the portion of the total portfolio that RNI holds is less and less dependent on BTI for its returns. We believe that the investment that RNI holds in PennCorp will make it a very attractive share for investors (locally and internationally) to get exposure to the unlisted PennCorp. This is very much a fundamental play with a long-term outlook (5 to 20 years). We have written a more detailed piece on the investment opportunity in the Investors Monthly magazine that will be published in the end-of-month issue of the Business Day newspaper. We would simply like to give readers of our weekly game plan an early heads up that a long trade has been triggered here and that there is good reason to hold onto this stock for many years.

*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.

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