There are still a few weeks to go before Christmas, but hopes of a Santa Rally are starting to take root. For now, most of our watch-list still appears bullish, although there are some warning signs. We could be seeing some early signs of fading momentum on the major indices, although it might still be too soon to tell.
That said, we expect the market to start slowing down and becoming slightly thinner (less volume trading) as the festive season starts to settle in. This quiet time in market can sometimes create ‘fun’ volatile moves on the back of lower liquidity, but can be rather dangerous. Thus, trading smaller positions with wider stops over the next few weeks
Offshore trade ideas
Interesting re-test of the consolidation here, although the SPY (and broader market) seems to be in a confusing place at the moment. The bull case is that both the larger and smaller consolidations have broken to the upside and are in the process of being re-tested. From a trend following perspective, we could be buyers off these breakout levels as they are re-tested. Further monetary stimulus from central banks in response to the COVID pandemic is certainly supportive of this narrative. On the other hand though, momentum oscillators are starting to fire off some sell signals. Although we need to see another two signals from the Stochastic Oscillator and another one from the MACD for the signals to be confirmed and thus tradable, they are starting to warn of waning bullish momentum. Thus we are approaching the coming weeks and any hopes of a Santa Rally with some caution. For now we do not have enough evidence of shifting momentum to prevent new long positions, provided that the long trades offer clear stop losses and good risk-reward ratios.
The (blue) pennant formation was re-tested and seemingly held. A break above the $303.50 level (which was also the previous all time high) could be a decent long entry, with a stop loss below $298 and a first target at the middle of the (light grey) channel. The second (full) target would the measured target from the (blue) pennant formation.
Russell 2000 (IWM)
Small caps have been outperforming their larger counterparts (as is usually the case this time of year – we mentioned seasonality here). Our target remains the upper extreme of the channel that IWM is currently trading in, although note that the current quartile has been putting up some resistance. We would be buyers sub-$188 with a stop loss below the middle of the channel.
Dow Jones Industrial Average (IYY)
Forgetting about momentum for a bit, another way to look at the market is by making use of Fibonacci retracements. From this perspective, a Fibonacci retracement measured on the market sell-off between February and March this year (from an all time high into a 36% correction) can be used to make a number of forecasts. The first is a 127% extension, which as we can see if currently proving to be a somewhat significant level. A further extension to the 168% level could drive IYY to $103.05. Again, there are a number of different ways of looking at this. Just a regular breakout of the rectangle consolidation targets $98.55 (approximately). Thus we can plan a trade here with an entry or below $93 and a stop loss below $88, a first target at $98.55 and a second target at $103.50.
Philadelphia Semiconductor Index (SOX)
SOX reversed nicely off the top of the channel. We expect to see support in the middle of the channel.
Dollar Index (DXY)
Our first level of 91 has been reached. From here we would like to see a move down to 89. This would likely be driven by further stimulus rhetoric. We note that the small consolidation (in light blue) could break higher to form a short-term counter-trend rally back to to 92. That could provide a nice high probability entry point into a trend following trade (short). This is currently not the most likely outcome in our view though, as we think that with additional lockdowns in Europe (Germany), more stimulus is almost guaranteed at this point and it’s very likely that we’ll see some central bank commentary around this in the coming week.
The ZAR will likely take its lead from the DXY, although it does look like the flat bottom triangle has broken and has now been re-tested. Our target of R14.50 to the USD remains.
Gold is still trading in the channel (flag) it has been stuck in since September. At this stage it seems to have found some resistance at the middle of the channel. Recency bias dictates that it should dip below the 200 day moving average again as it stays in this channel. Our thinking though is that further stimulus will drive the gold price higher to eventually break out of this flag formation and trade markedly higher. For now though, gold will first have to reclaim that $1850 level if the bulls hope to build a case for longs.
South African trade ideas
Kumba Iron Ore (KIO)
KIO, the slow motion train crash that turned into a good trade. Failed Head and Shoulders breakout targets around the R680 level. We pointed this out as a buy last week, so if you’re not already in this trade, don’t chase it.
RMB Holdings (RMH)
Oh we live with hopes of Santa Rally… if only we could see a close above R1.32 (now R1.35 as this has formed a resistance zone), then we could see RMH put in a decent rally. The longer this takes to build, the more power we would imagine there to be behind a breakout.
We’re also patiently waiting for a breakout on WHL. Provided that markets remain robust next week, this stock is looking fairly solid. Locally, president Ramaphosa is expected to address the nation on Sunday evening. Another hard lockdown should be good to food retailers as holiday makers will become food-makers-at-home. Should another hard lockdown be announced, we’d suspect that a short-term shock could be used as a buying opportunity.
A rather nice bull flag setup here on TRU, with a clear trigger line. Interestingly, the bull flag doubles as a re-test of a pennant formation breakout, and a push above the 200 day moving average. A breakout of this small flag could prove to be a great long-term entry.
The Foschini Group (TFG)
TFG offers a nice example of a long-term trend following strategy in action. The buying zone is the area between the 20 day and 50 day moving averages. Everytime that price dips into this zone, you can add to the position and move your stop loss up to the previous low. Moreover, we see a very clear entry signal line that can be used to initiate new long positions in this stock.
Standard Bank (SBK)
SBK is managing to hold above the previous resistance (now support). There is also a very clear trigger line for a long entry and stop loss present.
We’ve adjusted some of the levels on our SOL charts for a bit more accuracy. Specifically the R158 level that we’ve been referring to over the last few weeks, which we’ve lowered to R157.12 to mark the gap left on the 9th of March 2020. Below we show both the daily and weekly timeframes and note that a break above this R157.12 level would be very bullish indeed for SOL. Our first target would be around R234.
SLM is looking very good for a break higher out of this flat top triangle formation. It is also worth taking note of the fact that it is holding above the 200 day moving average. Once again, this could be a great longer-term entry for equities traders and investors.
We’ve been looking to buy NTC over the last few weeks, but so far have not managed to find the bottom. The hopes of a Santa Rally are strong with this one though. We note that NTC has been finding some support on the de Mark or Williams point of support made on the 24th of March 2020. This has been happening in conjunction with early signs (although not confirmed) of a bullish momentum shift. Looking more closely at the chart, we note a small consolidation on the support level. Our thinking is that a bullish break of that consolidation could be used a a long entry for a counter-trend trade.
NED showing a decent setup with clear trigger line for a long trade. Wait for the break of resistance before making a move.
MTN Group (MTN)
Oh no, the wheels fell off! Support comes in around the 200 day moving average (and below that at R53). It might be worth waiting for the support to be tested before getting involved here. A buy anywhere between R53 and R57 could be a nice entry for a longer-term holder.
Harmony Gold (HAR)
Most of the gold shares look the same at the moment. In the case of HAR, a break below R60 would stop out our long trades.
*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.