Spotting trends

Johannesburg - The JSE consists of large resource stocks, which have a huge effect on where the JSE All-share Index is heading.

In analysing the resources as an index, the main concern is to determine the trend direction. If you can do this with relative success, you will be able to take profitable positions in it.

The index that represents the 20 largest resource stocks is called the Resource20 Index. If you want to know what the general tendency of resources is, this is the one to watch.

Below is the daily chart of the Resi20. The relative strength index and the Mmoving average convergence/divergence (MACD) indicator appear below the price.

Note the following observations:



To determine the trend, a strategy can be used with two moving averages. In effect this is how the MACD is constructed, but this indicator can be a little too volatile for some market participants.

The chart also shows the 50-day (blue) and 200-day (red) moving averages. The interpretation should then be that as long as the 50-day average remains above the 200-day one, the market is trending up. As long as the inverse is true, the market is trending down.

Due to the long periods being used there is quite a bit of lag in this crossing, hence its reliability.

The previous time the averages crossed down was in July 2008. The index then fell hard, to bottom in November of the same year. Now it is once again crossing to the downside.

What will follow this time?

In our daily updates we analyse this index where we determine stop, buy and sell levels (this index is tradable as the RESI Index). The system sold this index four days ago, with an unrealised profit of 4.2%.

 - Fin24.com