Interactive Investor

Chart of the week: Always a great place to buy

13th April 2015 12:20

John Burford from interactive investor

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.

Ashtead Group remains bullish

Ashtead is a major industrial equipment rental business serving mainly the construction industry. Eighty percent of its income derives from its operations in the USA with ramifications for earnings in US dollars when converted to GBP. At present, the dollar is strengthening against most other currencies, including GBP.

The company is not usually regarded as being in a sexy sector, such as tech and bio, but it has generated solid share price performance over the years.

It has been a terrific under-the-radar investment for a long time.

This is the daily chart going back to 2010:

The shares have climbed steadily from under 200p to a recent 1075. And it has travelled along a classic tramline channel. The important point to note is that every time the market has challenged the lower tramline, it has found solid support. That means that when the shares have been near the lower tramline, that was always a great place to buy. The market is quite close to this tramline currently.

The question is: will this state of affairs be maintained? Let's look at the shorter-term picture:

This is the daily charts spanning the past few months. The December high to the upper tramline at the 1200 area was met by resistance and then began a decline that was in a clear three wave pattern marked A-B-C.

The important point about these three wave affairs is that they are corrective to the main trend. Observing such a three wave pattern is a sign that after the three waves have played out, the main trend is set to resume.

And that is precisely what happened in January. From that C wave low, the market resumed the uptrend and made it back to the upper tramline and the 1200 area. And when it hit that resistance again, the market began another A-B-C decline.

As I write, the market appears to be completing the C wave – and on a positive momentum divergence (red bars). Remember, a momentum divergence is showing that selling is getting weaker than it was on the A wave and usually heralds a turn.

Outlook

So, if history is any guide - and it usually is - these A-B-C patterns are indicating the bull market is likely not ready to end.

The market may decline further to meet the lower tramline in the 1020 area, where it would hit major support.

Of course, the bull run will end at some time - they all do. One possible indication that a turn down is occurring is for the market to make a solid break of the lower tramline. But indications are that this event has lower probability in the near term.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

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