A look at Sasol’s falling share price over the past few years shows several attempts to rally higher, only to fall back again and head still lower. The share seems to be stuck in a downward channel of some sorts.
According technical analysts, a descending channel on a price graph is a pattern that indicates a downward trend in the price which needs strong buying pressure to break to the upside – but then a big recovery is possible.
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The channel is drawn by connecting the high points and lows of a share’s price, with trend lines that form a distinctive downward channel.
Traders who believe the price is likely to remain in the channel place trades when the price fluctuates between the upper trend line (resistance) and the lower trend line (support).
A more potent trade signal may occur with a breakout, which is when a share price breaks the channel’s boundaries, either on the upper or lower side.
In the case of Sasol, the upper declining trend line seems to mark strong resistance. This is of significance because the share seems cheap when considering other measurements (and long-suffering Sasol shareholders would like to see a upward break).
Still going lower
Source: Lefika Securities
Costa Perdikis, technical analyst at Lefika Securities, says he is bearish on Sasol and will remain so until price action confirms otherwise. He says an analysis of Sasol’s performance relative to the JSE All Share Index confirms the downward trend.
“Technical analysts like looking at relative strength charts, obtained by dividing the price of an individual stock by the JSE All Share Index.
“When the ratio line is rising, the stock is outperforming the market. When the ratio line is falling, as is the case with Sasol, the stock is under performing relative to the market,” he says.
Sasol relative to the JSE All Share Index
Source: Lefika Securities
Comparing Sasol’s share price with the MSCI South Africa Index and energy exchange-traded funds (ETFs) also shows that Sasol has been lagging. “I remain bearish when looking at all the charts,” says Perdikis.
He says his aim is not to predict a turning point, but that Sasol is probably getting close to a bottom.
“You have to be patient, the share price will eventually stop falling and move into a sideways base.
“The base will be supported when value investors start buying.
“Value investors must be dipping their toes into the water or adding to existing positions,” says Perdikis.
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“When I last looked, Sasol was trading on a forward price/earnings ratio of [a low] 2.7 times and a dividend yield of 9%. But, from a technical price perspective, we still have no confirmation of a bottom or a price reversal.”
Trading opportunities
Speculators and short term traders might use a channel, or a supporting trend line and a resistance line, to identify potential entry and exit points at support and resistance levels.
A trader can buy (go long) whenever the share price bounces off the lower trend line and aim to take profit by placing an order to sell at the expected level of the resistance line.
More courageous traders can short-sell when the price hits the resistance level with the hope that the share remains in the formation and falls back from this resistance. The idea is to close out the position at the lower support line.
However, a stronger signal – and the one investors are waiting for – is that Sasol breaks through the resistance to the upside. An upside breakout would indicate a reversal, especially if confirmed by other indicators or a significant event that changes sentiment.
Prosus breaks upward
Prosus recently broke upwards through a downward sloping trend line.
Charts show that the Prosus share price formed a triangular formation for the better part of a year, breaking out a few weeks ago.
Source: ShareData
The breakout was due, brought on by the sharp jump in the share price of Tencent on news that it will launch a long-awaited new computer game. It also seems that Chinese authorities have relaxed their stance on the launch of new games.
This move meant that Prosus jumped nearly 20% from around R600 to R720 within days.
