Interactive Investor

Chart of the week: Omens in place for vigorous rally

2nd March 2015 13:27

John Burford from interactive investor

By John C Burford, author of Tramline Trading, and editor of MoneyWeek Trader

In these weekly 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.

A great bullish set-up

Standard Chartered is all over the news - for all of the wrong (or is it right?) reasons. The chief executive and chairman decided to quit (before they were pushed?) as the stock price has been falling for months. Apparently, the two largest investors, Aberdeen Asset Management and Temasek are none too pleased with the performance of the stock. And no wonder - at the recent £9 level, it has gone nowhere since the depths of the credit crunch in 2009.

Other banks have seen major profit gains in recent years, but not Standard Chartered.

It is easy to see why the stock has been weak since 2013. Its banking business is focused on emerging markets, especially in Asia, where over-capacity and commodity prices have hurt margins. There is also the thorny area of bad debts, and in common with all major banks, Standard's balance sheet will have hidden many of these.

With the overhang of the possible need to raise fresh capital, a rights issue is a very real possibility which will dilute the existing shares.

However, my beat is the technical picture, not so much the news. But the changing of the guard could be a psychological turning point - especially now that the market has retreated to long-term support.

Here is the long-term weekly chart:

From the Credit Crunch low around £7 in 2009, the market rallied to the £20 area in 2010 on the back of the historic QE operations, and the growing China economy.

But since then, the shares have retreated in three major waves in the form of a classic A-B-C. This pattern is characteristic of a correction to themain long-term trend, which is up (see text, pp 89-90, 97-104).

Also, the C wave has made a Fibonacci 78% correction to the major wave off the 2009 low. This deep correction, if it holds, is usually a precursor to a sharp rally phase, as we are currently seeing.

In addition, I have a decent - but not perfect - tramline pair working. The C wave has thrust below the lower tramline and is currently moving back inside the trading channel.

The omens are in place for a vigorous rally.

Let's now zoom in on that C wave:

This is my best Elliott wave count, which has an extended wave 5. Remember, fifth waves are ending waves.

Crucially, I can draw in a magnificent tramline pair (green lines). To complete the bullish picture, I have a very large positive momentum divergence, which also portends a strong rally ahead.

Outlook

I have a very bullish picture on the long-term and short-term charts. My first target is the upper green tramline in the £11 area. Breaking above that would set my next major target at the £13-£14 area.

Ultimately, breaking above the B wave high at the £20 area becomes a very real possibility.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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