Rand targets key technical levels

This year is certainly turning out to be a humdinger for the rand – surprising many exporters and importers with the extent and volatility of its moves, which culminated in a high of 10.36 against the dollar in June – its worst levels since March 2009. Since then we have seen a couple of months of consolidation above the 9.60 level, but just when many were starting to feel that things were settling down again, the market has again taken off. The ongoing question: Where to next? While mainstream analysts will look to news, economic data, central banker statements and socio-political events for direction, the fact is that price itself will always give you the best hint at future direction. The simple, but profound, reason for this is that there are laws that govern market fluctuations. In the 12th century, Italian mathematician Leonardo Fibonacci discovered one of these laws (of ratio and proportion), which is seen throughout nature, including financial markets (perhaps more about this in next month’s column). Market fluctuations tend to adhere to these ratios when they extend or retrace, and where there is a cluster of different wave ratios, this is often where a wave will tend to terminate. To illustrate, and also give a hint of future movements, below is a chart of the dollar/ rand since late 2000, which includes the huge price fluctuations since that date, which we have labelled Wave A, B and C. Using Fibonacci ratios, firstly notice how Wave B, which completed in 2008, retraced almost exactly 76.4% of Wave A. Looking now at some possible target for the current move off the 2011 low: • A 61.8% retracement of Wave A (from Dec 2001 high to Dec 2004 low) gives us a possible price target of 10.7044 • A 76.4% retracement of Wave C (from Oct 2008 high to May 2011 low) gives us a possible price target of 10.6058 • If we add some trendline analysis by extending a line joining the highs of 2001 and 2008, this gives us a resistance level just over 10.5000. • And further, if we draw some channel lines for the move from the 2011 low, this gives us a channel resistance line around 10.6000. The above gives us a price cluster in the 10.50 to 10.71 area, which is a likely target for the current move. With such a strong confluence of resistance, it is unlikely that this will be breached successfully on the first attempt (at least), and a retracement/consolidation is likely to follow. For further info go to www.ForexForecasts.co.za/ go/ZAROutlook. CAPTION James Paynter is the head market analyst at Dynamic Outcomes