Tadawul All Share Index (TASI) Technical Outlook

Summary (TASI 6002.88)

In the near term, we expect the Tadawul All Share Index (TASI) to trade in the range of 6700-5700 and advice a trading appraoch within this range with a strict closing stop loss at 5700.

As the market is trapped in a broad sideways range of 6900-4000 on a longer term basis, it is advisable to adopt a active money management techniques in the near term and wait for it to show a sustainable trend before shunning the trading approach and adopting a passive money management techniques.

Background

After showing a massive decline in 2008, the Tadawul All Share Index (TASI) bottomed out in early 2009 and rallied from 4000 to 6900 before settling in a much smaller range of 6900-5400 for the past 27 months.

Technically speaking, it is very difficult to analyze a market which is showing a sideways trend or no clear sustainable direction for such an extended period and it is advisable for investors to trade this range before an either side breakout happens. But practically, it is very difficult to adopt this view in the real world, as one should have a clear risk/ reward picture in mind before committing any money to work.

Keeping that in mind, we broke this sideways trend into two pieces. A near term price action range of 6700-5700 and a long term price action range of 6900-4000.

Near term price action (6700-5700)

We know that TASI is not doing anything on a longer term basis, however, within this trading range, the market is exhibiting a fair bit of volatility and one can take advantage of the price swings with a strict soploss. Though the broad sideways range is 6900-4000 but in the recent past, the range has further narrowed and a trade able range is now restricted to only 5700 to 6700, which is roughly 18% from low to high.

Currently, the Index is trading around 6100, which is closer to the bottom of this range and we advice investors to start buying in the range of 6000 to 5700 with a strict closing stop loss at 5700 level. Though the overall structure of the Index is flat but a breach of 5700 on the downside will open the way for the TASI to probe deeper levels and we may see 5400 and 5200 (the panic bottom set in March 2011) before it rebounds. On the higher side, the TASI is facing tough resistance in the range of 6700-6900 and profit booking is advised in this range. A clear break of 7000 resistance on the upside will unlock a long term uptrend which might take the TASI to above 10000 levels but till that time one should adopt a buy low sell high strategy.

Long term price action (6900-4000)

We don’t expect TASI to break the braod sideways range of 6900-4000 in a hurry as there are no indications of such an event. This sideways range is preventing us from making a long term call as we don’t know which way the Index will breach this range.

Technically speaking, sideways price action is very difficult to trade as one might face whipsaws as the price swings from one end to other with high ferocity and may create an illusion of a breakout. However, it is also a fact that, one can easily earn/ save massive amount of money in a shortest possible time frame, if one can correctly identify the breakout and act upon it diligently.

In our view, for a sustainable positive breakout, the price must clear the overhead resistance level at 7000 and rally at least 5% to 10% with heavy volumes (should be double the 3 months average) followed by a reaction bottom which must terminate around the previous resistance level (7000 level), which now must turn into a support level. Volume confirmation is also required for the validation and it should be in complete harmony with the price (price goes up, volume goes up and vice versa). Once we get a valid price/ volume breakout confirmation, then there is a strong possibility of a sustainable uptrend which might take TASI towards 10000 and beyond very quickly.

On the support side, the Index is very well supported around 5700 and a breach of this level on the downside will open the way for TASI to test 5400 and 5200. The Index may test sub 5000 levels and bottomout around its major support at 4000 provided it goes below 5200 level. In case of a breach of 4000 support on the downside expect a sharp drop towards 2000 levels but in our view probablity of such an event is very very low.

The article was written on 06/10/2011.