Chart of the week: A terrific opportunity

Prudential - is it ready to rally?

Prudential is not nearly as sexy a share as a gold miner or a pharma of course, but as the classic 'widows and orphans' stock, I believe it offers a terrific opportunity. And that is because of the patterns I see in the price chart.

The share high of almost £18 was made last year, and since then it has suffered from a growing negative sentiment surrounding its emerging market business. When commodities were in a bear trend until earlier this year, the conventional wisdom was that emerging economies would suffer and Prudential's business model would be hit hard as layoffs in oil and mining proliferate.

Prudential's strategy is to offer financial services to the potentially growing market of under-provided middle-class group.

Of course, when any apocalyptic scenarios are painted, you can be sure that the bearish sentiment has been overdone. And that spells a possible buying opportunity.

Here is the long-range weekly chart back to the 2009 low.

This is a textbook Elliott wave chart showing wave 2 as an A-B-C, a long and strong wave 3 to the 2015 high, and an A-B-C wave 4 down to an accurate hit-and-bounce on the Fibonacci 38% support level. So far, so textbook.

In fact, if you were paying attention earlier this year, you would have noted the wave 4 low at that Fibonacci level and likely concluded that at that £11 level, it represented a superb low-risk entry.

Since then, the market has rallied up to the £14 level and is in consolidation mode today.

Let's take a closer look on the daily chart

This is wave 4 in A-B-C form. Remember, three-wave patterns are always corrective to the main trend (up). I also have a good blue trendline which contains four accurate touch points. To be considered a reliable line of resistance (for a down-sloping trendline), I need to see at least three accurate touches - and this one qualifies.

So now, the market is edging up towards the trendline and will meet it at around the £14 level, and then on to new highs above £18.

But what could go wrong with this scenario?

For one thing, the rally off the 27 June low at £11 is an A-B-C so far and that means the market still has potential to reverse back down at any time.

And a break of that £11 low would put into great jeopardy the immediate bullish case.

The other point is that the market is eating into a lot of overhead resistance that could inhibit its progress.

The key level is the double bottom wave 4 low at the £11 level.

Outlook

So long as the £11 level holds, the trend is up and a test of the £14 level is likely. And if it can break above that level with force, odds become good for a test of the B wave high at around the £16 level.

Fresnillo reaches my long-term target

Back last year, silver miner Fresnillo was totally unloved. I would even guess that most investors had not even heard of the company! But as I pointed out at the time, this is precisely the time when canny investors should go off the beaten track and consider the profit potential when shares are easy to acquire from the beaten-down stale longs who are only too eager to sell to you.

But how times change! Now, the share is on nearly everyone's lips as it has risen exponentially along with silver's massive bull run.

I updated on May 31 when the shares had rallied to the £11 area and this is what I wrote then:

"But longer-term, the rally in silver (and gold) and the miners is not yet over. In the months to come, I expect new highs in silver above the recent $18 high - perhaps towards the $25 area and that will drag Fresnillo up well above the £12 high - perhaps close to the £20 region, which is the area of the major highs in 2011 and 2012."

So how has my forecast worked out? Here is the updated daily chart

I would say - not bad. The market took off like a rocket in June and into July and last week the shares hit my £20 target in style.

And that should be wave 3 (long and strong) of what should be a five-up.

Remember, my forecast was partly based on the Fresnillo Wedge that I identified before it had even been completed last year. And what a wonderful forecasting tool is the wedge!

Outlook

I expect a decline in wave 4 (in a classic A-B-C?) and then a move to a new high in wave 5 above £20. The alternative is that the decline could be deeper since bullish sentiment is off the scale.

But that hit on my £20 target was an ideal time to take at least some profits off the table.