Hi there,

Last week saw some volatile movements on the ZAR with both USDZAR and GBPZAR touching their highest levels in the past year or so. Quite a few were caught out by the strong downside correction on Friday after touching highs of 7.57 and 15.03 respectively but this was to be expected as the market had run out of legs by the time they reached these key levels. As I’ve mentioned many times before, the market can’t just jump from 14 to 20 overnight which is what seemed to be the expectation of many last week who were then surprised to see GBPZAR trading back at 14.50 on Friday afternoon.

Price was sharply rejected off the 7.57 and 15.00 levels on Thursday afternoon and the short term intraday price action was indicative of a very strong resistance area at these levels that will not lie down easily without putting up a serious fight. Both of these levels just happen to be the 2006 and multi-year highs respectively so I would have expected to find strong sellers defending these levels, forcing price down and away from these areas. This is a common market phenomenon where the market trades up to a particular level (usually a former price high) where it finds strong, aggressive sellers defending these levels. Around these key levels you find the following types of traders/investors (1) longer term sellers with short positions trying to defend these key resistance levels, (2) short term speculators selling off these resistance levels knowing that these long term players will be there trying to push price down and away from these areas, and finally (3) long term and short term players waiting for a break above these resistance areas to start buying or for stop orders to get triggered. Short term speculators are only in the market for a few cents profit and will immediately ‘flip’ their short positions to long on the break above the key resistance levels thus forcing the market upwards on a break above the resistance level (which is why you so often see the market break above a key level and shoot up 10-15 cents very quickly). It’s because everyone is now buying above these levels which forces the market upwards.

If the above doesn’t make too much sense just bear this in mind : Just below 7.57 and 15.00 you will have sellers defending these levels. Any break above these areas will see these specific sellers turn into buyers, as well as new buyers entering the market. Price needs to break above these resistance levels though to swing this psychology in favor of the bulls.

The primary point of the above is that there are a lot of players who have a vested interest in the price action around these levels and it is easy to now understand why and how price got rejected so quickly from these levels last week. The market was very overbought at the time and no-one really wants to be buying into these levels, they will only buy above these levels. So buying pressure momentarily dries up which gives the sellers the opportunity to successfully defend the level (which they did first time up)

It is also interesting to note that GBPZAR has touched the 15.00 level (but never successfully broken above it) three times in the past few years and on all occasions has been met with heavy selling. This makes this level even more important within the major trend and a clear break above this level could signal a major move upwards.

The importance of these levels means that they won’t give up easily as a break above signals to the longer term players that the short game is over. It’s more of a psychological thing than anything else. It’s like a game of tug and war with 15.00 being the centrepoint (or whatever that thing is called). The second that your flag goes over that line then it’s game over. So as the flag gets even closer, the side defending it pulls even harder as they defend their line. They carry on defending that level over and over again but each time that they do they only manage to pull the flag a smaller and smaller distance away from the line representing defeat. It seems only a matter of time until that flag crosses that line and once it does then it’s game over, the tension is released and the rope generally flies in one direction.

So it’s similar with the markets. We’ve seen a pretty big rejection of the 15.00 and 7.57 levels but I suspect that the market will start creeping up towards these as it slowly regains its breath and gets its strength back for another go. Particularly on GBPZAR – the 15.00 level is key as at the moment we have a triple top but I suspect that it won’t hold. I know this level is huge, the whole market knows this level is huge, and I suspect that when or if we break above it then the market will fly.

So hang in there for the moment and don’t expect miracles this week as the market is pretty tired and just trying to establish price at these current levels, and take a breather before giving these big resistance points another shot. I expect the market to range trade in the short term or even correct slightly further before finding willing buyers able to mount a challenge of these big figures.

View for the week – Rangebound preparing for upside move in next 1-2 weeks.

Good luck and all the best for the week ahead!

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