Interactive Investor

Chart of the week: Two big favourites

30th August 2016 14:56

John Burford from interactive investor

Pearson hit my target - now what?

I last covered Pearson pre-Brexit on June 13 and then post-Brexit on June 27. I had been bullish on this issue for some time and set my rally target at around the £10 area (it was trading around the £7 region when I started getting interested).

Just before the Brexit earthquake hit on 24 June, the shares were trading nervously, as indeed was the whole market. Below (top) is the chart I showed earlier, back in February.

I noted the descending wedge (sometimes called a falling diagonal) with the huge momentum divergence and this is what I wrote:

"My main target was the line of resistance at around the 1,000p area. My forecast was based on the three-wave nature of the decline off the March 2015 high and the ending wedge shown."

I was expecting a rally - hopefully in an A-B-C form - up to the pink resistance area just under £10. The very marked momentum divergence was on my side here - these usually provide the springboard for a sharp snap-back rally as short sellers are squeezed.

So let's fast forward to today - and it is very instructive to show the multi-year weekly chart for perspective:

As far back as 2011, the £10 level has been highly significant. Before late 2015, that level has been a major support zone. Just admire the way the market has been turned back up every time it has declined to it, as highlighted by the red arrows.

But then in late 2015, the game totally changed when the market plunged hard down past £10 to make a low of £6.44 in January.

With that development, the £10 zone transformed from a support level to one of resistance. I could then confidently state in February that if the market could rally back to the yellow zone, it would encounter much selling and be turned back (at least temporarily). From a trader's perspective, that event would trigger profit-taking on long positions.

And, indeed, that is precisely what happened. The rally has a clear A-B-C form, which is counter-trend. The C wave topped in July with profits taken at around the £9.80 level.

Here is the rally on the daily chart:

On this scale, I have drawn in a lovely tramline pair and the market is trading within the trading channel between them. The market fell hard off the C wave high and is currently testing the lower tramline.

Outlook

A clear break of that lower tramline would help confirm that the bear trend was continuing in a final fifth wave. But if the market could stage a rally from here to exceed the C wave high, the next target is the huge gap at the £11 area. That would set up a likely larger A-B-C that would carry the same message - a resumption of the bear trend.

BHP Billiton makes good upside progress

In my Chart of the Week of 11 July, I updated my coverage of BHP Billiton and noted that there had just been a bullish breakout of my major tramline:

I had great confidence in my tramlines, since I had three very accurate touch points on both (red arrows). That made the recent break highly reliable - and a trigger to take long positions (recall I had started getting bullish in February at under the £7 level very near the low).

Since then, the shares have been making steady upside progress and here is the updated daily chart:

The first rally off the low to the April high at the upper tramline is my wave A of what should be an A-B-C corrective pattern (wave B is already in place). Note that wave A was turned right at the Fibonacci 38% retrace of the entire wave down off the July 2014 high.

With that accurate hit, I can have confidence that the current rally will very likely stop at either the 50% or 62% levels at £11.20 or £12.50 respectively. Those are my major targets.

In an ideal word, wave C should have a five-up pattern. Let's now see if the market is conforming:

In wave C, I have a very good waves one, two and three - and we are now in the final purple wave five. The form of this wave suggests that there should be one more wave up to complete. Will the turn come at the £11.20 or £12.50 level?

Those are my major targets.

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