Senwes Scenario December 2016 / January 2017 | Page 36

••••

CO L U M N

Safex Scenario’s
with Susari
SUSARI GELDENHUYS

INTRODUCTION
The South African summer rainfall area experienced one of the
worst droughts since the 1991/92
season. Some analysts are of
the opinion that the dry conditions can be compared to those
experienced in 1972/73. Recent
weather predictions have, however, improved with the expected
arrival of a La Niña season, which
normally goes hand in hand
with above average rainfall (and
therefore above average yields) for
South Africa. However, there is
uncertainty about the realisation
of the good weather prospects
which will in all likelihood result
in volatile market movements.
The effect of such volatile conditions is that market participants
find it difficult to make good
hedging and investment decisions.
There are two general aids in the
form of fundamental analysis
and technical analysis which will
contribute to a higher probability
of success when such a decision is
considered.
Fundamental analysis and the
basis of technical analysis were
discussed in previous articles, and
the previous article focused on
the analysis of different price formations. This article will expand
further on the interpretation of
various price formations, which
will inlcude resistance and support lines, which form the basis
thereof.

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Graph 1: Trend line – Support and Resistance line.
SOURCE: COMPILED BY THE AUTHOR.

TRENDS
Trend lines are one of the simplest
aids in technical analysis, but are
also regarded as one of the most
important and most generally used
analysis in practice. Trend lines
can indicate upward, downward
and sideways market movement
by merely drawing a straight line
through three or more points on
a graph. The trading period and
type of chart (line chart, candlestick chart, etc) of the instrument
under observation can change,
depending on the requirements of
the analyst. Graph 1 is an example
of an upward trend indicated by a
long-term support and resistance
line.
Trends usually indicate the
interaction between buyers and
sellers. An upward trend is characterised by higher lows which offer
further support should a straight

DEC 2016/JAN 2017 • SENWES Scenario

line be drawn through the low
points. In this instance the buyers
are stronger than the sellers. The
opposite is true when, in a downward market, sellers are stronger
than buyers. This results in lower
highs and the straight line through
the high points therefore serves
as resistance. A balance between
buyers and sellers usually indicates
a sideways market. A change in the
dynamics between buyers and sellers is generally seen in a support
or resistance line which is broken,
which indicates that the preceding
trend will not continue. This is the
basis for the well known quote by
Ed Seykota: The trend is your friend
except at the end where it bends.
In instances where a long-term
support level (resistance level) is
broken, it will often also serve as
future resistance level (support
level). In this instance a break