Chart of the week: When to turn bullish on Glaxo

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.

Update - Fresnillo

I featured this very interesting share on 8 December with this chart updated on 29 December:

I show a lovely textbook five down to sub-700p and then a large wedge (see text, pp 33-38, 71-80, 152) in formation. This had all the appearance of a basing operation. I reckoned that if the market could break above the upper green line that would set the seal for a vigorous rally.

Another factor in support of my bullish forecast was the extremely bearish market sentiment towards gold/silver. Most pundits expect the PMs to decline with a commonly-held target for gold to sub-$1,000. I had the exact opposite view.

Now, just last week, the market broke up with gold out of the wedge on strength:

This now sets up my probable Elliott wave roadmap. If my labels are correct, we are in a third wave up - and these are generally long and strong. My first target is just above at the 850 area (the Fibonacci 50% level), but much higher targets beckon.

Another charting target based on the wedge thickness at the left hand edge is the 900 area.

As I wrote in December, this share holds great potential for appreciation over the next few months.

GlaxoSmithKline - a tonic for the bulls?

These British pharma shares have fallen out of favour in recent months. In fact, the Social Sentiment index (based on 1100 tweets) was a staggering 98% bearish. The basic problem for big Pharma is how to replace very successful blockbuster drugs with other smash hits when patents on their old drugs expire.

Another problem facing big pharma is that the NHS budgets are being squeezed and there is an imposed deflationary effect on drug pricing.

This is the weekly chart going back to 2012:

In late 2012, the market started a run up from 1300 to a high of 1800 in May. Since then, it has been in a bear trend and it ran down to match the previous 1300 support in October. But note the positive momentum divergence at the October low - a potentially bullish sign.

There was a clear shelf of support just above the 1500 level which operated for several months, but that support gave way in July. This area now became a ceiling of resistance, which was validated by the refusal of the market to push through it in November.

Since the October low, the market has staged a strong rally to 1500 and is now in retreat again and has tested the 1300 level once more.

The question is this: will the 1300 support level hold and are there any signs the market will start to rally? Is this a share to buy on the cheap?

Let's look at the character of the daily chart.

The rally off the October low is in a clear three-wave A-B-C (see text, pp 89-90, 97-104). This is a corrective pattern and portends a bear market continuation.

In my book Tramline Trading I list this pattern as one of my Top 5, especially when the rally terminates at the Fibonacci 50% level (as here), or at the 62% level.

Confirming this picture, the market broke hard and here is the hourly chart:

The October/November rally shows the clear A-B-C and now the decline off the December high shows a clear five-wave motive pattern. This is additional confirmation the trend remains down.

And now the rally off the 1320 low is another solid A-B-C (corrective) with the C wave hitting the Fibonacci 62% level on the nose.

So here we have several terrific demonstrations of the power of basic Elliott wave theory in combination with Fibonacci levels. There have been several low-risk trading opportunities along the way, especially at the two C wave extremes as well as the fifth wave low.

Outlook

The trend remains down and trading from the short side is the percentage play, despite the negative sentiment.

But if the market can catch a bid and rally above the C wave high at 1440, that would swing the odds slightly out of the bearish camp, but only a rally above 1520 would turn me bullish to a degree.