Interactive Investor

Chart of the week: Confident of further profits

20th February 2017 12:19

John Burford from interactive investor

 Will Randgold reach £80 again soon?

I last covered Randgold Resources on 5 September - and at an opportune time. The shares had been falling along with the gold price and had reached an important juncture.

I showed the chart below at the time.

The July high at near £100 was the culmination of a large scale 'five up', and if that was correct, the next big move would be down in a correction that should last a few weeks at least. That is one of the benefits of using Elliott wave methods - it is possible to make pretty accurate forecasts as to the direction (and shape) of the next trend. It certainly beats gut feel as a consistent system.

And so, on 5 September, the market had placed a quite accurate hit on the Fibonacci 62% support level a few days previously, and had hit my downside target at £70 where shorts were covered.

The shape of the decline was an A-B-C and so I was able to consider the decline complete and a resumption of the rally was possible. But I decided to hold my horses simply because the large July gap was staring right back at me - and it had not been filled. The fact is, most important gaps do get filled before a trend reversal can take place.

To reflect my caution, this is what I wrote then: "The market has fallen to the upper edge of the gap and the Fibonacci 62% retrace of wave 5. That is major support. The decline has a clear A-B-C feel (so far) - and that is a corrective pattern. Odds favour at least a decent bounce from the £70 level to at least the £80 area. But upside progress from there will be hard won."

And this is how the market developed over the following few weeks:

From 5 September, the market traced out an A-B-C rally - and right to the £80 level as I had suggested. Placing my Fibonacci levels on the entire decline, I also noted that the £80 level was also where the Fibonacci 38% resistance level was located.

With this evidence, it placed the £80 level as the likely entire extent of the corrective A-B-C rally and to place new short sales there. And, as the gold price weakened into its December low, these short sales gained in value as the shares entered the £50-£60 area.

But then the gold price started turning back up and this budding rally was flagged by this chart:

As the shares fell into November, they closed the July gap and that was a signal to start looking for a major turn back up - and to take profits on shorts.

With the huge momentum divergence gathering in December at the lows, this was a sure sign that the turn approached and when the small pink trendline was decisively broken, that was all I needed to cover shorts and go long.

This is where my tramline method comes into its own because the rally has continued and my centre blue tramline was penetrated in January, which was another bullish signal. Note that, after that break, the market tried to revert back to the centre tramline in a traditional kiss and scalded cat bounce.

It was a near-miss on the kiss - and that miss was a signal that the rally has tremendous strength. The decline back to the tramline wasn't strong enough to touch it, indicating powerful underlying buying.

And, in the last few days, the shares have hit T3 at around £75, which is a typical target in a trending market. T3 is drawn equidistant from the other two main tramlines and represents another layer of resistance in a bull market.

To sum up my trades, I was short from near-£80 and covered for a profit near £60 where I went long.I am still holding with the market at the £75 level.

Outlook

With the gold price in a rising trend, Randgold shares should reach the £80 level shortly. Longer-term, the £90 level is not out of the question.

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John Burford is a freelance contributor and not a direct employee of Interactive Investor. All correspondence is with John Burford who, for these purposes, is deemed a third-party supplier. Buying, selling and investing in shares is not without risk. Market and company movement will affect your performance and you may get back less than you invest. Neither John Burford, Shareprice, or Interactive Investor will be responsible for any losses that may be incurred as a result of following a trading idea.

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