Market Commentary: Bulls have their work cut out for them

What a week we've had last week on financial markets worldwide with tempered levels of volatility coming through creating the perfect storm. A few months ago I had written an article stating that the global markets had indeed become complacent with what price action was suggesting and that in order to find resolve we'd need to see an uptick in volatility.

At the time volatility was creeping to lows last seen many years ago. I want to revisit the chart that I had used 3 months ago to show the extent of what has unfolded and possibly try give some idea which direction we could be headed.

The chart below represents the JSE Top 40 over the last year on a Daily basis. I had said that the support level of 45500 was important and that if we saw a deep break to the downside we would see some sellers coming into the market. Observe that towards the end of September that break did occur and the follow up from the bears held that view.

From the level of 45500 the bears were able to secure a 4500 point drop or 9.9% demolition of any complacent bulls. Prior to the price dip my expectation was for the index to reach 44000. I've highlighted that level with two square boxes labelled 1 and 2. In box 1 you'll see that during May the level of 44000 was the trigger for the bulls to take the index higher which did happen. My thinking was that since this level was critical in helping the bulls take control of the upside we would see some protection of this level.

However we didn't see enough effort to hold the index at that level and subsequently the index came in for a hard landing. There's a few technicals that I think play a crucial role in the weeks ahead. Notice that when 44000 was broken there was a bounce. That bounce didn't materialize into a significant move and the 200 SMA (Blue Line) was touched but the index moved quickly away. Consequently there was a degree on confluence because the 44000 area was in the same region as the 200 SMA and they both failed.

The last few trading sessions suggests that the bounce could have some sustainability to it however the bulls are going to need to work hard to reclaim the sentiment and certainty before we begin to trend upwards again. I say this because the index is under the 200 SMA for the first time since June last year.  The 200 SMA is considered an important gauge by market participants in deciding whether the sentiment is bullish or bearish. With the index being under it presently it does shift the strength in the direction of the bears and gives the bulls the task of proving their worth.

We do see that the MACD lies deeply under the zero line which adds further evidence of bearish strength together with the fact that there is signs of bearish continuation divergence on the Stochastic. The bears/sellers will be waiting at the 44000 level because they know that the probabilities lie in their favour. In saying that the bulls are going to need to put in a really good performance for us to feel confident in the uptrend once again.

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