(Bloomberg) -- Weeks after advancing to a record high, South Africa's benchmark stocks index is triggering a bearish signal that could send the index to levels last seen in July, technical analysis suggests.
The FTSE/JSE Africa All Share Index, which closed at a record on Aug. 25, is poised to drop for the first month in three in September. The emergence of a reversal chart pattern known as head and shoulders signals that further declines are in store.
“We should see losses near term, then a rebound, after which the big fall should ensue,” Ray Brand, a technical analyst at Johannesburg-based ETM Analytics Pty, said by email. Head and shoulder patterns can also indicate a pause in the uptrend, but this is relatively rare. “I would look for a big drop in the index in due course.”
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While South African stocks advanced to an all-time high this year, they have lagged their developing country peers as a sluggish economy and President Jacob Zuma's scandal-tainted government discouraged some investors. The MSCI Emerging Markets Index has climbed 24 percent in 2017, almost three times the gain in Johannesburg's main gauge.
The index closed below the up-sloping neckline level of 55,200 on Wednesday, a move signaling that it might correct back to 53,300 once the pattern is confirmed, meaning a drop of 3 percent from current levels, according to Peet Serfontein, a technical analyst at Phoenix Capital.
Even so, a clearer picture of the next move might be yet to emerge, Serfontein said.
“Theory states that the volume on the left shoulder should be higher than the volume on the right shoulder -- this is currently not the case and this might classify the pattern as a failed head and shoulders,” he said.
Other historical trading patterns are more supportive for Johannesburg stocks: October is usually the best-performing month for the all-share index, with a 67 percent probability of gains, Serfontein said. The benchmark historically advances in the October-May period, he said.
To contact the reporters on this story: Neo Khanyile in Johannesburg at nkhanyile@bloomberg.net, Blaise Robinson in Paris at brobinson58@bloomberg.net.
To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, John Viljoen, Paul Jarvis
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