In the “January 11th” edition of the stock market outlook, we inferred that the general trend of the all-share index was up. The market breadth indicators, also, were positive and have shown little signs of weakness since then. The 9-month trend that began in April 2020 has remained strong and we can, now, safely argue that the index has been in an uptrend for the last 10-months. Whether the uptrend will continue is an entirely different question – so, let’s talk about it.
The monthly chart of the NSE all-share Index
Some observations:
- The all-share index has been in a slightly upward tilting channel from the April low to the end of last week (represented by the two white parallel lines on the chart).
- Based on the channel, through which the all-share index seems to be traveling, we estimate the next major resistance to be around 46,000 points.
- Since the high that was made, at 42,000 points, in July 2014, we have seen the all-share index struggle to break past the 42,000 level, two more times (the white circles on the chart). The index just recently (last week) tested the level again and looks like it is already struggling to stay afloat.
- The rally which started in April 2020 has seen the index close higher, 9 out of 10 times. The only losing month was in June 2020 and that loss was a net 3% decline. February, if it ends negative, will be only the second month where the index has failed to end “in the green”.
- The average monthly gain, during the 10-month rally to date, has been approximately 8.4%.
- The average monthly gain, during the last four months of this rally, was 12.18%.
Which way from here?
The observations made above indicate a really strong trend on the Nigerian all-share index, so far. The last four months, in particular, have been very strong as shown by the average monthly returns of 12%+. According to the principles of technical analysis, a trend is said to be in motion until it is proven to “not-be”. 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.
It should be noted, as shown in the image above, that there is a resistance at 46,000 points and another one around 42,000 points. The index started its most recent decline, on the 5th of February 2021, just after crossing the 42,000 mark. The big question is “will the index make one last push to rally above 42,000 and test 46,000? Or, will the index fail at 42,000 points?
No one knows which scenario will play out. What we can do, though, is watch these levels closely and quickly analyze every piece of information that comes into the market. The more we receive positive news, the better, and vice versa. The first of such events will play out this week when the National Bureau of Statistics discloses the inflation figures. Any significant rise could create a negative sentiment in the equity markets as investors would worry about a potential hike in rates.
So, what should you do?
If you are not already invested, it may be smart to wait to get a bearing of the market’s direction. There is a potentially strong bias that the market could struggle to get above the resistance that it has come in contact with at 42,000 and 46,000, especially if there is a reason to expect a rate hike.
If you are already invested (and very likely in the money), I think it is, relatively, too early to pull out of the equity market. As indicated in the image above, there is support around 40,000 points (the yellow line labeled “minor support at 40,000”). The market may pull down to test support before extending its rally up to 46,000 and the support at 40,000 is the ideal point to provide good support.
In conclusion, the all-share index has been in a strong move up from its low in April. That move has brought it to previously robust areas of market sell-offs. There is a feeling that there may not be enough wind in the sail to push the index above 46,000, therefore, the market may slow down. This current trend, though, should not be underestimated. Every time that it looked like a slow down was coming, it showed resilience and bounced back. Investors need to pay attention to every move the market makes henceforth – it could be critical to your short-term profitability.
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