TAKING ADVANTAGE OF MARKET CORRECTION TO BUY IN DIP

In the past two weeks, the benchmark index has been on the decline, during which the month of August closed negative in the aftermath of profit taking and cautious trading as the market would not react positively as expected to impressive corporate earnings and economic data including the slowly sliding inflation and the latest report from the National Bureau of Statistics (NBS) which confirmed that Nigeria’s economy recovered, although sluggishly from recession after five successive quarters, spanning 15 months.

The sell-off witnessed was part of market dynamics especially after a long rally as investors became concerned over the sustainability of the economic recovery with the way the fiscal authorities continue to foot drag in the implementation of Nigeria’s 2017 budget that ought to be the catalyst for economic growth and development. It is known that government is the biggest spender in any economy and there is the compelling need to compliment the various interventionist activities of the Central Bank of Nigeria (CBN). This has been most visible in the foreign exchange window of the inter-bank market where the apex bank continues to support the manufacturing sector by opening an Investors and Exporters window to ease access to forex, while encourage inflow of capital and investments into the market and economy, since these can be easily repatriated when there is need. In furtherance of this desire to encourage seamless and transparent inflow of capital, the CBN announced the creation of a new electronic Certificate of Capital Importation (e-CCI) platform which takes off on Monday, September 11, 2017.

The Nigerian Stock Exchange (NSE) composite All-Share Index (ASI) hit a high of 38,198.60 in August 11, 2017, after which it took a plunge of over 2790.81 points to a lows of 35,407.79 by September 5, 2017. This represented a 7.31% slide in just 15 trading days that spanned the period.

The question for this post-holiday week is: Will the composite NSEASI continue to reward traders who have been buying every dip, or is it finally time to sell on this rebound?

I have been writing for some times now about how to position on the strength of companies earnings that are trending up and have the possibility to beat estimates in the next earnings season and in the process influence price movement in the market. Since the sessions following the March of 2017 lows we have seen several pullbacks that created opportunities for buying and then rebound to continue the up rally. From February till date we have seen negative news or events that crashed the market even while analysts were so sure that the market would continue to attain higher highs.

Now that the market has finally rebounded after two weeks of pullback, the experts are now linking the escalation to the expected earnings season and review of government strategies in the implementation of the 2017 budget with the hope that this would sustain the economic recovery and growth as we move farther from recession as reason for likely movement of the market from the 35,407.79 low. The high of 38,198.60 had been an ideal target zone for another breakout that will confirm another bullish market this period.

I recall that during INVESTDATA’s “Invest 2017 summit,” we predicted that 2017 will be a bullish year, noting that the Nigerian Stock Exchange had never in its history experienced three straight years of down market and all the stocks recommended at that summit, as those who attended or purchase the seminar materials would attest, have recorded over 50% year to date,better than the All share Index’s Year-To-Datereturns now at 34.37%. Beyond that, INVESTDATA Research sees the market closing the year positive with many stocks hitting three year highs on the strength of improving company, market and economy fundamentals that will influence their prices,helped by the fact that different sectors of the economy are looking up already as revealed by the Q2 GDP fugues. 

"If the benchmark index is able to follow-through in anspontaneous pattern up of that March 6th low then we have an ideal target zone on this smaller degree timeframe right in the 35,407.79-38,198.60 zone. This zone has excellent confluence with our larger degree Fibonacci target level of 38,212 as it falls right with that smaller degree target zone’’

If the 38,198.60 level was indeed the top of the larger degree fourth wave as noted on the charts below, then the target level that I had laid out on August 11 would have been within four points of the actual high.

Again, this was before the correction was escalated by profit taking and cautious trading due to delay in implementing the capital expenditure side of the budget 2017 and expected economic reforms policies. The targets that were laid out were based purely on our Elliott Wave analysis and our Fibonacci Pinball targets. These tools help us measure sentiment in the market based on what we are seeing in the charts. So, rather than rely on some economic news only, there is need togauge market sentiment also.

The market does still have a bit of work to do before proving that the 38.198.60 level was indeed the top of the larger degree fourth wave, but hitting the ideal target within four points is certainly a decision just as time to sell or hold to breakout which is always very dicey for many traders and investor.

What's Ahead?
There are two distinct paths that I am currently watching on the Index. These paths are shown in green and red on the charts below.

The green path would suggest that the NSEASI has already made a larger degree top in wave (E). This should then result in correction down towards the 38,198.6-35,407.79 zone for wave (D) prior to turning up again into 2018.

The scenarios above suggest that the NSEASI will see higher levels into the end of 2017. It is really just a matter of whether the pattern needs another minor high prior to seeing the larger degree top for wave (E).

The initial move down of the 36,534.34 level was corrective in nature, and the index has so far held over the smaller degree support level of 35,320.12. So for these reasons we still do not have initial confirmation of a top being in place just yet.

The next signal that the NSEASI has indeed topped would come with a breakout of the 37,047.6 level followed by a breakout of the 38,198.6 level. If those two resistance levels can break, then we will once again focus on the 39,200.13 level as the next signal that we have indeed struck a larger degree top for wave (E). Although a break of the 38,214.16 level would signal that we have indeed struck fairly significant top, as long as the Index is able to remain over the long term support levels at 38,198.6-24,426.16, there are still likely higher levels to be seen into 2018 if the government doubles its efforts at driving this growth, staying away from mere sloganeering andavoiding the distractions of the politics of 2019 election activities.

In all these, what is important for you as an investor or trader is knowing when to sell for profit and when to hold cash and just watch for another opportunity that beckons.