Chart of the week: New analysis of 2014 charts

By John C Burford, author of Tramline Trading and editor of MoneyWeek Trader

In these weekly articles, I will highlight a share that I believe has an interesting chart pattern. I am primarily a technical trader and use the methods I have developed that I call Tramline Trading. You can read more about my methods in my book Tramline Trading, which you can inspect here.

Most traders and investors make classic errors by chasing a stock near a top and then hang on to it too long during the decline. You will vastly improve your performance by timing your entries and exits more expertly - and that is what I hope to help you with.

My goal in these articles is to cover a share that has an interesting chart. I I developed my tramline system over several years to give me a set of rules which can provide me with trade entries at low risk. The low risk requirement was crucially important because no matter how firmly I believe in my trade, I could be wrong! And I wanted my wrong trades to hand me the smallest possible loss to my account. I figured the winners would take care of themselves.

My hope is that you glean useful ideas and employ at least some technical analysis to bolster your returns. In trading as well as investing, timing is a key factor in your eventual returns.

2014 review

I started this series of Charts of the Week in October and here at the end of the year is an update of many of them.

Royal Mail - 9 October

The market was in a severe decline after the initial IPO euphoria as more sober analysis of Royal Mail’s prospects spread. But with a 30% drop in value into October, and with the looming momentum divergence, I reasoned that the market could be forming a base around the 400 level. This was the chart then:

Action: Hold shorts from 550p and set protect profit buy stop in pink zone.

Royal Mail update

Just a day or so after posting, the shares took off and took me through my protect-profit stop at 430 for a banked profit of 120 points. I kept one eye on the looming positive momentum divergence at the lows (red bars) which told me that selling was drying up and to expect a decent rebound.

That was a timely call because the market vigorously gapped up through the upper tramline (see text, pp 54-55, 68-70). In fact, the shape of the recovery turned out to be a clean a-b-c three-wave form (see text, pp 89-90, 92-104). This is a signature of a counter-trend move and so I expected a resumption of the decline, which duly occurred on 19 November with a big plunge.

Today, the market is testing the 400 area and I see no obvious pattern at present. The market is forming another pattern which will be revealed in time.

Nikkei - 16 October

The market was in a major decline off the September highs. This was the picture then:

I had a superb Head and Shoulders top reversal pattern (see text, pp 26-32) and the short trade was activated on the neckline break. The market was in deep decline and naturally, I was looking for a place to exit the trade, but only on a definite signal, such as a tramline break to the upside.

And I did not have to wait very long. Here is the chart update:

Nikkei update

The market started moving up and through my short-term tramline and I was taken out at the 15,300 level on 22 October for a substantial profit of around 1,000 points. And a spread bet of £10 per point equated to a profit of £10,000.

The rally produced a lovely rising wedge (see text, pp 33-38, 71-80, 152) into December. This is one of my favourite and reliable patterns. When the market broke below the lower green line, that was a high-probability shorting signal.

The subsequent rally has taken the market to the underside of the wedge line in a series of kisses (see text, pp 82-84, 143). This is a vivid demonstration that the wedge line extension is now a line of resistance. I call the kiss the "moment of truth" because if the market rallies above the line, it usually has sufficient power to move on to new highs.

If it fails, then the market usually enters a scalded cat bounce down and the resistance holds. So the current price at the 18,000 area is critical for the bulls. A failure here would indicate a sharp decline into 2015 is likely.

Tesco - 17 November

Tesco was another market in free-fall and this was my best guess then:

When a market is as one-way as this - which is a typical litmus test for a third wave - the question is always: when will the wave end? Third waves are notorious for their persistence and just guessing where they will turn is usually an exercise in catching a falling knife (and getting your fingers badly cut).

It is always best to let the market give you definite clues, such as a large momentum divergence. This usually indicates a lessening of selling pressure and can herald a reversal of some sort.

My suggestion was that there is more downside to come, but to expect a decent rebound soon.

So how is my roadmap working out?

Tesco update

This is the updated chart:

In mid-December, we had a dip to a new low, but that was accompanied by a huge positive momentum divergence.

If the market can rally above the November high in the 195 area, my original target area of the 240 area should be achievable. And if my EW labels are correct, that would be my wave 4. The next move should then be a resumption of the downtrend to a new low in wave 5, as it bounces off upper tramline resistance.

If this rally takes the form of an A-B-C three-wave affair, that would strengthen my case for this scenario.

But if the market rallies strongly above the 220 -240 tramline resistance, all bets are off and the next target will be the 280 area.

If you are a short-term trader, the prospect of a long entry at the 200 area and an exit at the 240 area could appeal.

But for me, the best percentage play would be to look to short on good rallies, looking for that wave 5 to form below 150.

Barclays - 24 November

I made this forecast for Barclays: "If my upper tramline can be solidly broken, I would take that as an indication the market wants to move up to the 250 - 260 area (a Fibonacci 50% retrace of the entire move down)."

Barclays update

The market did hit the lower bound of my target at 240 and is knocking on the door of my upper tramline resistance again:

If this holds, the market will come under pressure in January and test the lows. But if tramline resistance is overcome, my target becomes 270 - 280 which is in the zone of the Fibonacci 50-62% retracements.

Fresnillo - 8 December

This share is in a very interesting position on the charts. I made a forecast that with gold/silver due a multi-week rally, Fresnillo will awaken. Here is the updated chart:

I have a lovely five down complete with a positive momentum divergence at the wave 5 low and a forming wedge pattern. If the market can break up out of this wedge, that would help confirm the long-term support and herald a move higher to the 900 area.

If it breaks below the lower wedge line, it means the move down is not yet complete. But with gold/silver starting rallies, I place this at lower odds.

British Telecom - 22 December

I had the short-term hourly chart for BT showing a wave 4 low being formed on the tramline support and a forecast rally in wave 5:

This is all part of the large wave 5 up. The implication is this: when both fifth waves terminate, the market will begin a bear phase.

BT Update

Since then, the market has extended the small fifth wave rally:

And the market is knocking on the door to new highs. The test will come when this new high is achieved.

Wishing all of my readers a very Happy New Year!