I have always considered myself to be fairly tech-friendly, sporting an array of gadgets whose purchase cannot be ascribed to need.
Apparently, being born during or after the 1960s is a significant factor in determining whether or not you will be able to keep abreast with technology. According to the smug tech wizards, people born before the 1960s might as well crawl into a cave and go back to using an abacus. Fortunately, they are not always right.
Technology has certainly changed technical analysis (which I discussed in my June 18 column), but apart from the ability to receive and manipulate information faster - thanks to computers and the internet - the basic principles and skills have remained the same. Perhaps this is because it was never an exact science to start with, but rather a process of disciplined observation, with some interpretation thrown in. So, even if your birthdate precedes the 1960s, you can still improve your investment decisions by employing technical analysis.
This week, I want to look at the support zone, which is the alter ego of the resistance zone (which I covered in last week's column).
The two are closely linked, because once a share breaks through a resistance level, that level can become its support level in future. Conversely, if a share falls through a support level, that zone is likely to become a future resistance level, as relieved shareholders sell their shares for the price at which they bought them and in so doing keep the price from rising.
A support zone is defined as a level or share price range where buyers enter the market in sufficient numbers to keep the price from falling.
An interesting titbit about support and resistance zones is that they often take place at round numbers. The theory behind this is that previous buyers or sellers find it easier to remember those levels. However, although I have observed this phenomenon from time to time, I am not entirely convinced of the theory behind it.
Let's recap the rules when observing support and resistance zones. Firstly, the more activity and time spent at a support level, the more support the share price is likely to receive. A good example of this is Allan Gray Property Trust. The share rose from 80c to R2 in the early 1990s. However, from 1995 the price seemed stuck at a resistance zone of about R2. The price eventually rose at the end of 2000, nearly seven years after the share first reached R2. That breakout created strong support at R2 for the future. The share price rapidly rose to R2.65, and when the headwinds came in 2001, with a weaker rand and fears of high interest rates, the price only retreated to the support level of R2. Thereafter, a move to R3 and above created the next support level at R3.
Secondly, the harder a share falls before the support level kicks in, the more likely the support level will hold. The first time Tongaat fell to a support level of about R30 from its all-time high of R82 in 1997, it had halved in a year. After rallying to R62 in 2002, a decline - caused in part by a stronger rand - was again halted at the support zone of R30.
Finally, if a share has been supported for a long time while the market has fallen over the same period, be very sceptical. Double-check the valuation before believing that you are being presented with a buying opportunity. This is especially true of untradable or smaller cap shares, where loyal buyers keep coming back for more despite the fact that the market as a whole is falling.
An example of this is Afgri, whose share price remained above the support level of about R4.80 throughout the market decline in 2002. The support level eventually gave way in 2003, and the share price fell rapidly by 25 percent.
One of the key buying opportunities involving resistance and support levels occurs when a share finally breaks through either. An interesting share at the moment is Investec. It has not yet broken through all of the resistance created in the four years up until 2001 of about R240 to R250, but it has overcome its previous resistance levels of R175 and R200, and now has some support at R200. If it breaks through the higher resistance levels, the share has the potential for a big upward move.
Investec is a share to monitor closely, as most of the disenchanted shareholders who bought during the four years until 2001 may well be out of the way.