Interactive Investor

Chart of the week: Is BT now a buy?

15th May 2017 12:51

John Burford from interactive investor

The BT Group has had a poor press lately with its UK broadband network heavily criticised, the recent profit drop and of course, the Italian arm's accounting scandal. The dividend yield remains quite juicy at around 4.5%, but the ballooning pension deficit must be a worry for the bulls.

Last week, the share price had fallen to the £3 level that has not been seen in four years. But is it now a buy for the 'buy low, sell high' theory adherents?

As the lumbering giant of the UK telecoms sector, it can still offer profit potential for traders. The big plus for trading very large cap shares is that they usually offer fewer nasty surprises than smaller operations such as reside in the FTSE 250 or especially AIM (a market I avoid).

But I am a trader, not an investor who is willing to sit through huge swings in the share price so long as the dividend cheques keep coming. As a trader I wish to make profits from those swings - and what incredible percentage swings they have been over the years.

 

This is the monthly chart going back to the dotcom era of the 1990s. Incredible as it seems now, BT shares were also swept up in the dotcom mania and reached the dizzy heights of £10.58 in December 1999.

Yes, even a staid 'widows and orphans' share, as BT certainly is, couldn't escape the mania that swept up most shares that had a website. I recall, that was the very rationale offered behind BT's own bull run - it actually did have a website.

It was all about 'eyeballs' in that crazily surreal era. But when the penny dropped (that very few companies were actually making any money, or were ever likely to), the bubble finally burst and BT's share price slid down to the sub-£2 area within three years.

I have highlighted the mountain peak nature of the boom and bust period since I believe that this shape will be replicated in many share price charts in the bust to come. The prime candidates? The FAANG Gang.

But I digress. From the lows post-bubble in 2003, the pattern is a clear A-B-C with the B wave hitting the sub-£1 level in the wake of the 2009 Credit Crunch crash. The decline of 90% off the £10 high was a beautiful example of the Rule of 90% which states that when a share has been in a bubble, the aftermath is a loss of at least 90% of peak value.

The rally off the B-wave low was in a C wave that completed at the April £5 high. Here is that C wave in detail:

I have a nice 'five waves up' with wave 3 particularly long and strong. I particularly like the overshoot of the upper tramline in November 2015. Whenever I see an overshoot after a lengthy bull trend, I suspect that it represents buying exhaustion - and the next major move is down to trade inside the trading channel again.

In fact, I use overshoots as an important input when deciding whether a major trend is likely to be changing.

And the market started its decline as the market moved inside the channel and I was able to draw a minor support tramline (in pink) across three major lows. A break of that line was another reliable confirmation signal that the major trend was firmly down.

And here we are about a year-and-a-half into the decline off the C-wave high with the market having hit the lower tramline, which is a line of support.

The big question is whether this support will hold.

The form of the decline suggests a corrective A-B-C three-down and, if so, looking for a long entry is warranted. So let's zoom in on the daily chart:

This is the C-wave showing the huge gap that opened up following the Italy accounting revelations. That very powerful wave surely is a third wave and the bounce off it in wave 4 took the market to a highly accurate hit on the Fibonacci 50% level and immediately turned down in wave 5, the final wave. Once again, Fibonacci shows his worth.

Then last week, the shares moved below the £3 mark to match the wave 3 low back in January and that sets up a possible 'double bottom' scenario and with a huge momentum divergence, odds are now growing that a major low is at hand.

With the general market in the form of the FTSE 100 making new all-time highs this morning, that should support my case. But a hard break of the £3 level would delay the onset of the recovery. At least, buying here is a low risk opportunity where stops can be set close to entry.

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