Interactive Investor

Chart of the week: This share is mid-rally

9th January 2017 12:32

John Burford from interactive investor

Serco rallies - against the pundits

I started getting interested in Serco last summer when the company was on the receiving end of much bad press, which intensified the deeper the shares traversed its long-term bear trend.

The list of horror stories associated with the company was almost endless, with poor performance on government contracts standing out. Many were expecting more bad news and share price forecasts were plumbing new depths.

A barrage of negative publicity often occurs as a major trend is about to terminate. As if to justify a bearish posture, mainstream media (MSM) pundits succumbed to the negative groupthink by penning bearish opinions that would be welcomed by a large audience. After all, that is their main task - to have maximum readership for the publication.

Follow the age-old maxim to 'buy when there is blood on the streets'A strongly contrary opinion would attract a much smaller readership - and subject the author to ridicule (or even job security issues) if he/she is proved wrong.

That is why you rarely see a firmly contrary opinion in the MSM, unlike here.

But we can use this knowledge of herding to our benefit and follow the age-old maxim to buy when there is blood on the streets (figuratively speaking, of course). In this case it wasn't blood, but red ink.

This was the chart that confronted me in the summer:

The downtrend was beautifully contained within the trading channel between my pink tramlines, but, in 2015, that all changed with an upside break, and by mid-2016 there was a lovely falling wedge pattern (blue lines) that spoke to me of a massive trend change that would be confirmed by a break above the upper blue wedge line.

And that happy event was realised in July last year at around the 100p level, which was the level at which I advised a long trade.

So, how is this trade progressing, five months later?

Another factor that impelled my bullish stance in the summer was the very large momentum divergence at the low. After a lengthy downtrend, if that trend is about to reverse, I like to see such a divergence and my general rule is the steeper the divergence, the sharper the ensuing rally.

So, now the shares are trading at the 150p level - 50% higher than entry. Not bad, but is there more?

Typically, when I see a falling wedge with a large momentum divergence, I set my target at the start of the pattern. I have found that, most often, this zone acts as a magnet for prices. It acts in a similar way to the magnetic pull of a large gap.

Look out for bullish company news to emerge - that may well be a good time to take profitsIt so happens that we have both magnets at the 220p area! How convenient. The large gap and the early 2015 rally high at that area are exerting a very strong pull.

There is one thing I can forecast with high confidence. If the market does make it to that area, we will read company news that is bullish (from the same pundits that were bearish last year?). You can take that to the bank. After a good rally, the pundits always turn bullish.

That would be a real-time demonstration of the principle that it is the markets that make the news, which is not what most people believe. So look out for bullish company news to emerge - and that may well be a good time to take profits in a delicious appreciation of the power of the press.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.

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.

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