Nigerian Stock Exchange (NSE) Technically Confirms a Bullish Mode

On February 3, 2010, the NSE all share index technically confirms a bullish trend by breaking above 23,392, its 200 day simple moving average (DSMA) as highlighted in the graph below.

As shown in the graphic relationship between the NSE all share index and the 200 DSMA below, the breach of the index above the 200 DSMA is the first time in 15 months, and it indicates finally that the NSE is technically in a recovery(bullish) mode and there is a change in the market dynamics.

Although the NSE all share index have confirmed a bullish trend, it appears that the buying has been very selective.  The buying has concentrated on sectors such as Banking, Breweries, Building Materials, Food/Beverages, while stocks in other sectors (i.e., Agricultural, healthcare, insurance sectors, etc ) have not participated in the market rally.

Although the market dynamics appears to be positive, most stock charts show that investors are not being overly speculative, the rallies have been selective, and the average rallies have lasted only an average of about 4 days before a retreat.

Stock Selection Process

Since this rally has been selective, investors should focus on stocks that are breaking out with very little over head resistance if they want to participate. For example FBN is a stock that appears to have significant price resistance, while Access Bank appears to be breaking out.

First Bank Nigeria (FBN)

 Since September 2009, the stock price of FBN has had problems breaking above N16.00k. In January 12, 2010 the stock hit N15.93 and retreated, again on February 4, 2010 the stock price hit N15.96 and recoiled again creating a double. The N16.00k price level is a significant price resistance for FBN, while the N14.00k is a significant price support.  As I noted in my earlier article, “Profit Taking Not Responsible for NSE January 2010 Pullback”; FBN will have to trade above N16.50k price level, and sustain the price to resume definite uptrend. While, I expect this stock to eventually break above this N16.00k price level, investors should be aware that the fair value of FBN based on their most earnings report is about $15.22k.  Therefore, the decision for an investor is probably to buy the stock at the current level and wait for it to breakout, or find another stock that has already broken out, or breaking out.

Access Bank

Investors can always find stocks that are preparing to break through a resistance by watching the relationship between the price and volume together. Technically, greater volume should take place in the same direction as the prevailing trend. Technicians believe that volume precedes price, meaning that the loss of upside pressure in an uptrend or downside pressure in a downtrend actually shows up in the volume figures before it is manifested in a reversal of the price trend. For example, for the last two weeks, the Access Bank’s volume/price trend confirms this phenomenon.

The price broke out of a 6 weeks consolidation on January 29, 2010 on a volume (49 million shares) almost 4 times higher than the average daily trading volume of the previous two weeks. Although, the stock retreated on Friday losing N0.48k, or 5% to close at N9.12k, the stock still has the potential to move higher.  The pull back to the mid N8.00k price level is probably an opportunity to take a position in this stock. As shown in the graph below, Access Bank is trading above its 20 DSMA and 200 DSMA. Additionally, the stock is using it 20 DSMA as support as it moves higher reflecting a sign of strong relative strength.  With all the aforementioned good news for value investors, it does not appear that there is a large space to move on the upside, since the fair value of this stock is around N11.00k.

In conclusion, although, the NSE all share index has broken above its 200 DSMA, indicating a bullish trend, there is a possibility that the index will pull back from its 200 DSMA if the trading volume and traders convictions evaporates.  Therefore, it is not time for excessive speculation. Investors should know the fair value of each stock before buying, and should not stray far away from the true value of any stock.