Interactive Investor

Chart of the week: How low can Vodafone go?

28th September 2015 13:44

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 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.

Hanging up on Vodafone

Vodafone shares have been hit in recent months as mobile phone operators face saturated markets in most parts of the world - and that is why they are trying to merge and cut overheads, but with little success (the proposed tie-up talks with the cable giant Liberty Global have just broken down as reported this morning).

In any case, the shares have declined by about 20% since the high in May. Here is the weekly chart:

The first thing to notice is that I have an excellent tramline pair with the lower tramline sporting a Prior Pivot Point and two pretty good touch points. The upper tramline has the two major highs as touch points.

Since early August, the market has been in a steep decline and that is typical of a third wave. Here is the daily chart:

If I am correct, wave 3 could terminate near the lower tramline, bounce in wave 4 and then another decline in wave 5, which could complete below my tramline.

Outlook

The chart looks bearish and continued declines are likely. My first target is the 190p region. But a solid break below the lower tramline would likely herald a much lower target. The odds are high that rallies will be short-lived.

Update on Randgold

On September 14, I suggested that Randgold was on the verge of a big rally. This was the medium range daily chart I posted:

At £37 level, the market had made a new low for the move and had matched the November 2014 low. That made the entire move down off the £56 high a potentially complete five down. It had all the elements that characterise a textbook Elliott wave five-wave pattern. The significance is that when the fifth wave completes, the market will enter a rally phase and retrace part of the entire decline.

Wave 1 is in a complete mini five down with the third wave long and strong, as is typical. There is also a positive momentum divergence at the low (marked in purple) which indicated a reduction in selling pressure.

Wave 2 is a textbook three-wave A-B-C pattern (with a small negative momentum divergence (not marked), and wave 3 is long and strong. Wave 4 is an A-B-C and the hourly chart of wave 5 shows that it was likely ending near that £37 print.

So that entire move down off the £56 high conforms in all material respects to the ideal Elliott wave impulsive motive wave that is in the process of completing prior to a rally phase.

That is why I was able to forecast a rally ahead. This is the current daily chart:

Not only do I have a complete five down but the market has traced out a wedge, with the market about to test the upper wedge line. But the big test for the rally will be when/if the market challenges the upper line in the £40 area.

But if that test fails, odds increase for a re-test of my wave 5 low. For clues, here is the hourly chart showing the decline off the wave 4 high:

The decline is in a clear five waves with a large momentum divergence at the wave 5 low. That makes wave 5 a complete motive pattern - and ripe for a rally. The rally has carried to the Fibonacci 50% level - a typical retracement. And the rally has occurred in an A-B-C (so far).

That means the key for a rally extension will be a break above Friday's high. If that fails to materialise, the trend remains down near-term - and another test will be my wave B low. If that is penetrated, odds grow that the wave 5 low will be re-tested.

As of this morning, the potential is high for a more complex wave pattern to be traced out while the gold market consolidates its recent very good gains.

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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We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

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