Weekly game plan 1 March 2020

Wow! Honestly, we’re at a loss for words. Last week was… crazy. As for the week ahead… we have no idea what to expect. We keep seeing news flow suggestive of escalating coronavirus fallout on an increasingly global scale. We also saw that Chinese PMI numbers came in the lowest on record. In other words, lower manufacturing and production activity in China than even in the depths of the 2008/9 financial crisis. Lower than ever recorded. Considering that China now makes up almost 20% of the global economy and accounts for two-thirds of global growth, this record low PMI reading is truly concerning. The real question now is, when do factories come back online? There are some hopeful signs that things are stabalising in China, although simultaneously it seems the the coronavirus is spreading throughout the world faster than expected. Honestly, we can’t tell if it gets better or worse from here.

USD/ZAR

The USD/ZAR exchange rate has breached a number of the resistance levels we had market out on it. At this stage it looks as if there is a flat top triangle could break higher on the weekly time frame. We are open to the idea of the Rand finding too much resistance overhead and moving back down to the lower end of the triangle, but we are not very confident in that view. We feel the most probable outcome is a bullish break of the triangle and a longer-term (multi-week to multi-month) move toward the R18.44 level. Given the backdrop of the coronavirus and the potentially long-term negative growth impact it can have on global markets, we do think that Emerging Markets, and thus EM currencies could come under pressure. As a side note, the Budget last week was good, but if we don’t deliver and Moody’s remains unconvinced… well, that supports the Rand weakness outlook. Let’s see what happens. We will be on the lookout for confirmations that this triangle formation is breaking in the weeks to come.

S&P500

Wow! We did have the view that the SPX could come down to test previous resistance as new support, but we did not expect it to happen this fast. In fact, this is the fastest that the SPX has pulled back over 10% from all time highs in history. This looks and feels like proper panic. A lot of bottom pickers will likely rush in tomorrow considering that there is a doji candle formation, but we are not so sure that is the wisest course of action. Our support level didn’t stand a chance in the face of the sell off and with some fresh bad news coming out over the weekend (U.S. coronavirus death and extremely poor Chinese PMI numbers), we’re not sure that the sell off is over.

We have no triggers here, we have no setups. We can only say that these are extreme times and urge traders to be cautious, patient and disciplined. Wait for confirmations before trying to pick bottoms and always plan for the worst case scenario. Proper risk management is what is going to separate the traders who survive from those who don’t.

Standard Bank

Our traders picked up that SBK is triggering a medium-term short trade on the weekly chart. We like the high risk-reward ratio that this trade offers. We not two potential targets on the downside; the first being the longer-term bullish trendline (indicated as the dotted purple line around R120), and the second being the measured formation target around R82.

Kumba Iron Ore

KIO is a stock that we have had out eye on for some time. On the daily timeframe we got a trigger to go short during the course of last week and we now note that we have a weekly short trigger as well. We fear that the risk-reward ratio may no longer be as favourable as it once was, unless you take the view that the full target of R100 is achievable. In that case the risk-reward ratio is good enough to trade on a weekly basis. R100 is a long, long way down… but these are financial markets, nothing is impossible.

*Please note that these trade ideas form 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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