Will Resource Stocks Break the JSE Top 40 Out of Its Consolidation?
Quick overview
- The FTSE/JSE Top 40 Index closed down 1.21% at 106,052.50 ZAR amid signs of short-term fatigue in broader equity indexes.
- Strong commodity prices, particularly in gold and platinum, are providing some support to the mining sector despite local economic challenges.
- South Africa's inflation rate has risen to 4%, increasing the likelihood of a pre-emptive interest rate hike by the SARB.
- A bullish continuation pattern suggests potential for a short-term rebound in the JSE Top 40, with key resistance and support levels identified.
A sharp technical retracement on South Africa’s FTSE/JSE Top 40 Index saw it close -1.21% at 106,052.50 ZAR despite some areas of strength across the board.
While strong global commodity pricing underpins South Africa’s main sector, mining, broader equity indexes are showing signs of short term fatigue due to localised economic headwinds weighing on local sentiment today.
Factors Moving The Market Today
Commodity Shielding: Gold and Platinum Group Metals (PGM) stocks, specifically AngloGold Ashanti and Sibanye Stillwater, are seeing strength as steady central bank buying globally has helped cushion the resource sector.
Local Inflation Watch: Recent economic figures indicate that South Africa’s year-on-year inflation rate rose to 4%, pushing towards the ceiling of the central bank’s targets and increasing the chances of a pre-emptive 25bp rate hike by the SARB on the 28th of May.
Rand Strength: The South African rand saw some gains during the day. A stronger local currency helps limit pressures from imported costs for retail-focused companies, though at the same time makes it more expensive for dollar revenue companies in the country to convert earnings.
Technical Assessment
Looking at the 4-hour chart, we see a very typical continuation pattern setup with the JSE Top 40 printing a bullish hammer candle following a retest of the major black descending trendline that began at the April peak.
The deep red leg held the floor of a parallel falling channel alongside a blue moving average dynamic support zone at 107,765 to 108,518. The momentum gauge has calmed significantly at 41 to 48 and is starting to form a positive divergence. This setup adds a lot of credibility around a short term rebound.
Resistance Levels: 106,800, 107,765 to 108,518 (Blue MA confluence) and a long term swing target at 109,168
Support Levels: 105,455 (Channel Floor) 104,208 (Fib level) and long term support at 102,908
Trade Setup
A solid, well-defined continuation setup is just above resistance today.
Buy stop order >106,800 Targets: 108,518 (T1), 109,168 (T2) Stop Loss: <105,400
JSE Top 40 Technical Outlook
We have seen the JSE Top 40 work through a necessary shake out today, while also using a large mining sector exposure to weather some domestic monetary frictions ahead of next week’s SARB decision. A looming interest rate hike may hold back a larger scale breakout, but the structural support of the long term trendline indicates institutional buying is still strong.
Keep an eye out for any global PMI data and the SARB statement to see if financials are able to join the resource stocks in the rally into next quarter.
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