In last week’s stock market outlook, we made some observations. A brief recap of those observations should remind us that:
- The all-share index has been in a slightly upward tilting channel from the low it made in April 2020, with the top of that channel somewhere between 42,000 and 46,000 points.
- Since the high that was made in July 2014 (around 42,000 points), the all-share index has struggled to break past the 42,000 level.
- Recently, the all-share index tested the 42,000 level again and looked like it was already struggling to stay afloat.
A quick view of the price action of the all-share index confirms that the index has dabbled into quite important levels which could dictate its new mid to long term direction.
Some troubling indicators
The chart above shows the following major points:
- The index, since testing 42,000 points recently, has been on a noticeable decline
- The 40,000 points level has proven to be a critical area from where the index breaks-away. The index currently sits at 40,439 points.
- The 50-period moving average sits at 39,200 points ( just under the 40,000 level).
Even more troubling indicators
The trend of the market, as manifested by the price action, is only one part of the story. The market breadth is another part that requires serious attention. A quick glance at an important market breadth indicator infers even more troubling signss= for the Nigerian all-share index.
The ratio above gives an indication of how many listed companies are trading above their 100-day averages. The more stocks that are trading above their average the better, and vice versa. Looking at the chart above, we can see that the ratio has been on a rapid decline since the end of January.
Why is this important? If the stock market is in a trend, it is preferred that a significant portion of its constituents are involved in that trend. If this is not the case, it is implied that the trend is suspect as a stutter from a few stocks could send the trend the other way. With the ratio of stocks, on the all-share index, that are above their 100-day averages has started to decline, and aggressively too, it could be an early indication that the market is headed for lower territories.
Again, which way from here?
Our last outlook concluded with the following statements. “An uptrend is over only when it makes a lower high and a lower low. So far, it is still early days to know whether the index will make a lower high”. Based on the recent price action, though, it would be reasonable to add some qualifications to the above statements.
The long term trend, as evidenced by the monthly chart that we have been using for the past few weeks, is obviously in an uptrend. The intermediate trend, though, maybe showing what could be the first leg of a new downtrend. The key to whether this downtrend manifests or not is what happens at 40,000.
If the index is able to hold up above 40,000, we will continue to believe that the index is still bullish. If, however, the index is able to breach 40,000 points convincingly, we will move on to a more critical analysis of the market to identify new support levels.
In conclusion, please watch what happens around 40,000 points on the all-share index. Also, pay attention to the upcoming news concerning inflation, crude oil sales, etc as these could affect interest rates, which could also affect the equity markets.
Till next week, invest responsibly.
