•••
CO L U M N
SUSARI GELDENHUYS
SAFEX SCENARIOS WITH SUSARI
INTRODUCTION
The South African summer
rainfall area is still experiencing
one of the worst droughts in
three decades and there is a lot
of uncertainty about the current
season. All participants are forced
to investigate alternative sources
of income. Various opportunities
exist on SAFEX but the current
volatile market environment
makes it difficult to make good
investment decisions. However,
there are two resources in the form
of fundamental analysis and technical analylsis which will contribute towards a higher probability
of success when such investment
decisions are being considered.
Fundamental analysis and the
basis of technical analysis were
discussed in previous articles and
this article attempts to expand on
various technical indicators which
are used to indicate the current
price trend.
• Leading and Lagging indicators
Leading indicators give predictions of future price movements,
mainly by determining the extent
to which the market is overbought
or oversold. These indicators offer
a higher probability of identifying
opportunities, but these types
of indicators are associated with
higher risk. Leading indicators are
normally statistically more suitable
for use in trading markets.
In contrast lagging indicators are
not aimed at predicting future
price movements, but rather at
following price trends. These indicators generate buying and selling
signals only after a real turnaround
in the price trends, which in turn
decrease returns because of buying
and selling signals normally being
late. Despite this the lagging indicators are less risky than leading
indicators and profit opportunities
are still identified. Lagging indicators are statisticallly more suitable
to be used in trending markets.
• Over-purchased and over-sold
markets
The above concepts are very important since they serve as basis to
generate buying and selling signals
for a large number of indicators.
An overbought market is associated with the number of sellers
(supply), which is a lot less than
the number of buyers (demand).
In such an event prices normally
move to a potential price peak as
the supply and demand for underlying commodities generate a new
equilibrium price. In contrast with
an overbought market, an oversold
market is characterised by a significantly lower number of buyers (demand) compared to the number of
sellers (supply), which will eventually result in a potentially low price
level as a new equilibrium price is
generated by supply and demand
for the underlying commodity
DEFINITIONS
Before discussing the technical
indicators, it is important to define
certain ideas and concepts in order
to serve as basis for the discussion.
• Trending and Trading markets
Prices move in trends which can
be categorised as trending and
trading phases. A t