Interactive Investor

Chart of the week: When is this blue chip a buy?

18th April 2017 12:51

John Burford from interactive investor

Sage bounces off Fibonacci support

Sage has been one of my favourite shares since I started writing this column. And no wonder - until recently, the shares have been in a solid bull market for many years with few setbacks.

I last wrote about it on February 17 and explained the chart patterns were giving classic trade signals. In particular, I was able to draw a tentative tramline pair on the weekly chart:

Note that the tramlines are not textbook, but are my best attempt with the data offered. I have only two accurate touch points on the upper tramline and the same number on the lower tramline.

In order to give me high confidence in tramline placement, I like to have at least three accurate touch points on each tramline. With that, I have solid lines of support (places to go long) and resistance (possibly places to exit and perhaps to reverse and go short).

The above chart shows that the lower tramline was broken in January and gave a sell signal on that break at the 630p level. That was a nudge to take profits on longs and/or position short.

Incidentally, the first sell signal was given at 720p in November as shown on this updated chart:

The topping process in the August – November period allowed me to draw a minor tramline underneath the lows of that period – and these were accurate touch points, thus providing the first sell signal on the break at 720p and on a momentum divergence.

Since the February break, the market has traced out a lovely downtrending pattern whose highs followed the pink trendline down (with three/four accurate touch points).

In recent weeks, the market has tried to get back above my lower tramline, and has finally succeeded. With the March high at 660p now being taken out, is this a signal to cover shorts and go long?

But what about my tramlines? I have a rule that says if the market breaks a line and then takes time to trade on each side of it (as here), then I abandon my tramlines because they are not accurate lines of support or resistance.

The result is that I can disregard my lower tramline as a line of resistance.

So was there a way to predict the likely low of the correction into February? Yes there was – and it is down to our old friend Fibonacci again. Here is the weekly chart again without my tramlines but with the Fibonacci levels drawn:

I took as the lower pivot point the 2014 low since it was a major low. From the 800p high, I can now count a three-wave pattern in a classic A-B-C correction with the C wave turning right at the Fibonacci 38% support level (yellow bar) and with a large momentum divergence at that low.

That hit on the Fibonacci level is about as accurate as can be expected – and that is where limit buy orders could have been placed ahead of time. And short trades could also be covered there.

But with the pink resistance line having been penetrated, do I have enough information to go long? The rally off the C wave low can be counted as three waves so far and that pattern turns me cautious. A better entry level will probably be found at slightly lower levels (currently 660p).

Two weeks ago, I covered Randgold and gave a cheeky suggestion that there was more upside in the near-term with this comment: "But with the market now testing solid support at £69, I would not be amazed if the shares had a little upside surprise in store."

Gold has been in a major bull run and the surprise I suggested was certainly to the upside with shares now trading up to the £76 area.

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