Chart of the week: Barclays sell-off over?

John Burford is author of Tramline Trading and editor of MoneyWeek Trader

In these articles, I will highlight a share that I believe has an interesting chart pattern. I am primarily a technical trader and use the methods I have developed that I call Tramline Trading. You can read more about my methods in my book Tramline Trading, which you can inspect here.

Most traders and investors make classic errors by chasing a stock near a top and then hang on to it too long during the decline. You will vastly improve your performance by timing your entries and exits more expertly – and that is what I hope to help you with.

My goal in these articles is to cover a share that has an interesting chart. I I developed my tramline system over several years to give me a set of rules which can provide me with trade entries at low risk. The low risk requirement was crucially important because no matter how firmly I believe in my trade, I could be wrong! And I wanted my wrong trades to hand me the smallest possible loss to my account. I figured the winners would take care of themselves.

My hope is that you glean useful ideas and employ at least some technical analysis to bolster your returns. In trading as well as investing, timing is a key factor in your eventual returns.

Is Barclays a buy?

Today, large British banks are about as unloved by the public as they have ever been. From the forex-fixing scandals of the investment arms to the PPI mis-selling scandals of the retail arms, millions of pounds are being transferred back the Exchequer in the form of mega-fines. The latest developing scandal now is pensions (annuities) mis-selling. The amounts involved are massive

Some are saying this is deferred pay-back for bailing them out during the Credit Crunch. It's a kind of a "pay Peter to rob Paul" effect. That is especially relevant in the case of RBS - a taxpayer-owned bank.

Incidentally, investors with an ethical approach to investing must be asking themselves if banking shares really are suitable for them.

But as a major UK bank which more or less escaped the Credit Crunch of 2007 - 2009 relatively unscathed, Barclays presents an interesting share from a trading perspective. For dividend-hunters, it is not especially appealing with a recent yield of around 2-3%. With huge pressure on all banks to clean up their acts, and the prospect of tougher retail banking conditions ahead, what are the charts saying?

Here is the daily chart going back to 2010:

(click to enlarge)

The late 2011 lows were made after a solid downtrend and the subsequent rally into 2013 was in a classic A-B-C form (see text pp 89 - 90, 97 - 104). The point about an A-B C is that when the C wave has terminated, the main trend down resumes.

That places the C wave in a terrific position for trade timing. If you can correctly identify the end of a C wave, you can enter a trade early in the new trend and ride it a long way.

And from the 2013 C wave highs, the market has been trending lower in a series of heavily overlapping waves.

The interesting observation about this decline is that it has made overshoots of all of the Fibonacci levels - the 23%, the 38%, the 50% and the 62%. Normally, I would expect pretty accurate hits on these levels before staging bounces.

This is telling me that selling on the way down has been heavy.

The latest test of the Fibonacci 62% level last month was another overshoot. This 62% level is the most common retracement of a previous wave and is usually a good place either to take profits on a short trade, or to probe the long side, expecting a significant upward bounce.

On the other hand, the 62% level is often the starting point for a more substantial rally. Here is a close-up showing my tramlines which the market has been following off the high:

(click to enlarge)

The market made two tests of the 200p lows in recent months and the latest bounce off the October low is taking the form of an A-B-C. Because this pattern is counter-trend, it should eventually reverse.

And the ideal place for this reversal is from the upper tramline (see text, pp 116 - 118) around the 240 - 250 area (marked in pink). Remember, tramlines are lines of support and resistance that the market has respected.

This is a wonderful example of how markets often follow a trend by moving in the trading channel formed between the tramlines. Normally, a market will bounce off well-formed tramlines in a continuation of the trend. These are excellent places to enter low-risk trades because if the tramline is broken, that is a sign the trend has very likely changed - and you would want to question your position at the very least.

Outlook

Rallies should be contained by my upper tramline and unless this line is broken in a major way, the trend remains down.

If my upper tramline can be solidly broken, I would take that as an indication the market wants to move up to the 250 - 260 area (a Fibonacci 50% retrace of the entire move down).