Lacking support

WITH THE JSE and world markets having sold off sharply over recent weeks, we look at a chart of Anglo American, the JSE’s third largest share (by market capitalisation). It’s ominously testing an important support level. We also look at diversified resources stock African Rainbow Minerals (ARM), which has already broken below important support. The medium-term picture doesn’t look good for both stocks. Anglo is threatening a breakdown while ARM is already on its way to a far lower target.

ANGLO – Testing critical support

Trend: Short and medium term down. Long term sideways.

Strategy: Sell short the bounces.

* Anglo American recently dropped to retest critical support at line 1 (currently R260,50). Line 1 hasn’t been convincingly broken yet, but that could happen at any time. Lines 1 and 3 form a large channel/wedge; while lines 1 and 2 form a medium-term channel. The price is trading well below its 200-day moving average.

* The short-term stochastic oscillator (on top) is giving a positive divergence from its oversold region. That’s a warning of a rally to come, which I expect to be temporary.

* Traders sell short on a rally towards the R278 level.

* Investors to reduce holdings. Only look at buying near the downside targets.

* There are two downside targets: Target 1 is R225 and target 2 is R207 (the height of pattern 1-3 projected down).

* For shorting after a rally, place your stop as a close above R289. Once the price breaks below R250, move your stop down to above R274.

ARM – Breaks support

Trend: Short and medium term down. Long term sideways.

Strategy: Sell short the rallies.

* African Rainbow Minerals has formed a large head and shoulders pattern (as labelled). It recently broke down below line 1 (the “neckline”) to confirm that large bearish pattern.

* The pattern is pointing to a downside target of R116,50 over the medium term.

* The daily stochastic is oversold, so expect a relief rally very soon, which will be temporary.

* Traders sell this stock short on a relief rally to the R160-R164 zone. Currently, medium- and longer-term players shouldn’t be holding ARM.

* While there will be support at R141 and again at R126, the main downside target is R116,50 (measured as the height of the head and shoulders projected down).

* Place your initial stop-loss relatively wide, as a close above R168. Once the price gets close to R140, lower your stop to a close above R161. Medium-term players can simply hold a short position all the way down.

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