Equities listed on the Nigerian Exchange Group (NGX) depicted by the All-Share Index has rallied over 171% since it got to a low of 20,651.6 in April 2020 at 20,651.6 to reach a high of 55,985.50 in March 2023. Interestingly, within this upward movement in the ASI has breached series of technical resistances and encountered retracements. An investor who accumulated at the bottom would likely be returning over 100% returns investing in the market.
If you had invested at the recent low reached by the market at 43,393.2 (using the monthly timeframe), the resumption in the upside rally would have offered investors about 29% returns to when the ASI got to the all-time high of 55,985.5
Many investors relate and interact with the market with diverse intentions some capital gain, some growth investing purposes while some just for dividend returns. Fascinating about all these actions and interactions the price never lies that is why technical analysis can forecast likely future price movement in the market for both the broad index and individual stocks.
As a financial technical analyst who trades and offers TA research advisory services to investors and traders in the Nigerian capital market space for years, I evidently strongly believe that the market tends to respects key technical analysis principles.
Let’s dive into why two weeks ago I recommended to my clients to either completely exit or scale down their investing activities in stocks (combine TA with FA valuation)
Top-down approach
Studying the monthly chart of the NGX All Share Index (chart below) using the wave principle, the ASI is in the 5th wave.
Wave 1 (Impulse wave) is seen at 42,444.2 reached on the month of January 2021 from the lowest low of 20,651.6
Wave 2 (Corrective wave) movement from 42,444.2 high to 37,555.3
Wave 3 (Impulsive wave) a move from 37,555.3 to 54,290.8
Wave 4 (Corrective wave) a movement from high of 54,290.8 to low 43,393.2 (higher low)
Wave 5 showed a completion at 55,985.50
The completion of the 5th wave usually indicates a possibility of the market entering a consolidation phase or reversal in market trend.
Source: Tradingview NGX ASI monthly chart
Now let’s study the weekly timeframe to see how technical analysis confirms the market trend and sentiment. This is an interesting price study to validate my forecast bias.
Source: Tradingview NGX ASI weekly chart
Historically the NGX ASI has conformed with the signals generated by the relationship between price and the relative strength index (RSI).
Looking at the weekly chart below, when the ASI price action is trended down (formed lower low) in 2019 to 2020, the RSI which is at the oversold territory is slightly indicating a higher high pattern (2019 – 2020). This is a positive divergence indicating technically signaling that most stocks traded on the NGX is undervalued and they may be poised for an upward rally. The market confirms this assertion as evidence showed that the stock market began its rally from then on (remember this is the beginning of the impulse wave in the monthly timeframe)
The second case (second red line drawn at the top) was a negative divergence where price and RSI showed a inverse relationship but this time RSI is at overbought (price action formed a higher high 2021 to 2022 high but RSI began to decline formed a lower high relative to the 2021 high). The market then respected this relationship and trended downward before another pickup in rally to the all-time high.
In the third case the red line drawn at the top showed a similar relationship as the second case but in this case the divergence is relatively strong (not flat as the 1st and 2nd cases) also remember this is the 5th wave identified on the monthly chart. Since the formation of this relationship, the market has resumed a downward movement.
What to expect
Technically, we expect the market to either continue the newly began downward movement or to enter a consolidation zone. I would be looking at the 46,000 – 47,000 support zones for a possible support (the bounce on the moving average seen in the chart is another topic for another day).
My suggestions
Investors and traders should restructure their portfolio mix to endure a reduced beta and seek for alpha in other asset classes which would make the portfolio less exposed to market volatility that can adversely affect it. I still believe some stocks are underprice that is trading below their estimated intrinsic values.
Technical analysis can help investors time and reduce risk exposure in the stock market both for short and long term investing. I recommend to combine both fundamental, technical and sentiment analysis for optimum returns in the market.
Thank you for reading and watch out for my next TA on the market
Adeshina Adetunji CFTe
Certified Financial Technical Analyst
Partner, Trendonomics Partners Limited
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