Interactive Investor

Chart of the week: Could this blue-chip lose 80% of its value?

24th August 2015 12:36

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 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.

This is one historic day, make no mistake

As I write this morning, the FTSE 100 is a sea of red - not one single share in the 100 that make up the index is not in red. This a rare day, indeed - but totally foreseeable, as I have been pointing out in my articles.

I have shown several charts over the past few weeks that were shaping up for big declines. They were highlighting the fact that all was not well with the global markets. Many sectors had made their highs long ago - with commodities and commodity companies being the poster child for the deflationary wave that is sweeping all before it.

I realise that most of my readers hold shares in their portfolio and seeing this brutal action - with the FTSE down over 15% off its April high - is a painful sight. Of course, many individual shares are down a lot more than that. And it is no comfort to have me point out that the storm warnings were legion.

For those readers who are not afraid to trade from the short side, this is hay making time - and just reward for the patience in waiting out the huge topping process where whipsaws were commonplace.

Because I have long held the view that much of the huge build-up of global debt will have to be written off - with massive deflationary consequences - banks will be hard hit. In fact, that process is already starting.

Barclays is front and centre of the deflationary wave

The technical picture in Barclays is looking very bearish. Here is the weekly chart going back to the previous bear market in 2007 - 2009:

(click to enlarge)

The market has been trading within the large wedge for almost seven years in a textbook five-wave pattern. When markets make a wedge pattern, I like to think of the market as like a watch spring being wound tighter and tighter.

As the coil is wound tighter and tighter, it eventually breaks and the market just flies apart out of the wedge extremely rapidly.

If/when the market breaks the lower wedge line, the move should be dramatic and the 2009 lows at the 50 pence zone will come into play. I realise that this target seems totally preposterous with central banks ready to step in (again).

But if they do, they will be pushing on a string. Just see what is happening in China. Despite bans on short selling and on large sales (not forgetting the huge war chest the authorities have pledged), shares are still collapsing.

The power of the market exceeds any government "stimulus", even in China.

Let's now look at the short-term daily chart:

(click to enlarge)

Two weeks ago, the market made a high at the 290 area - and hit the Fibonacci 62% retrace of the previous wave from the May 2014 high to the July 2014 low. Remember, this Fibonacci level is a common turning point for trends - and so it proved here.

On Friday, my lower tramline was broken and this morning, we have a gap lower opening as panic selling grips the general market. The market is off by around the same 15%.

My first target is the lower wedge line in the 230 area.

Outlook

Not good. A break of the 230 area should result in a rapid decline - and the market would then head for the 50 pence area which could be reached within a year or so.

I fully expect bank runs to re-emerge. Cash will be king.

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.

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