Chart of the week: Huge moment for Barclays

Update on Barclays

I have been bearish on Barclays for many months as I have with the entire banking sector. Not only was the 2015 commodity bust going to hurt earnings, but I figured banks would need to set aside capital for many more loans that would go bad (impairment charge). Also, falling interest rates would crimp margins.

Indeed, that scenario has played out in spades with Barclays, which traded at a recent high of 280p last summer (where I first became interested in a shorting campaign) and has declined to the recent 145p print.

That high put in the final wave 5 of my famous Barclays Wedge that spanned seven years - a very long time for the market to trade in a narrowing band.

It is instructive to analyse the psychology of traders/investors in that time. Barclays has been a typical 'widows and orphans' stock - one to put in the back of the drawer and forget about as the dividend cheques roll in like clockwork.

In the past, bank shares have rarely been a target of day traders, short sellers and ten-baggers, but that all changed in the credit crunch of 2007-2009 when Barclays plunged from 750p to 47p - a staggering loss of 94% in value.

I would guess that most investors hung on for dear life through the crash - and still hold them seven years afterwards! And in common with most unsophisticated investors, they are hoping the shares will regain their former heights so that they can sell at a profit. Retail investors usually fear taking a loss - they see it as an act of cowardice or failure, perhaps.

But those heights seem as far away today as they were seven years ago. The best level reached was the 400p level set late in 2009 and each rally since then has fallen short of even that lowly figure. Imagine what long-term investors are thinking. At some point they are going to give up hope and finally sell - and typically that happens when the market is sliding again.

So the break of the lower tramline in November last year signalled the start of a renewed bout of stale long liquidation. But at some point, this selling dries up and that is usually when the news is really dreadful. I call that a selling exhaustion - and that is what occurred a few days ago, an event I was well prepared for.

This is what happens when a particular setup occurs in the wave count and sentiment. Here is the daily chart of the slide off my wave 5:

The break of the lower wedge line last year was a major sell signal and that was at the start of wave 3 down which progressed in textbook 'long and strong' fashion. I love third waves! They can usually be relied on to provide relentless fast action in your direction.

When wave 3 turned in February, the relief rally in wave 4 was in a typical A-B-C form that helped identify it as a genuine fourth wave. Then, a renewed slide to a new low occurred in wave 5, and on a very large momentum divergence, which told me the selling was drying up fast - and I had better take action.

Here is a close up of recent action:

Wave 5 moved lower against my down-sloping pink tramline. But I could then draw a lovely blue tramline set with the equidistant T3 pointing to a target, which it hit on the nose earlier this month.

And when the market moved up above the pink tramline, that was my signal to take some profits off the table by covering some short positions. That was a superb whale trade from the 280p level to my 150p exit.

And, like a shot, the market staged a sharp rally to Friday's 170p high. Note that this was a kiss target I had set up beforehand. And was an area where I had a great interest in! A kiss on a rally to the underside of a major tramline is a key event, and indicates a high probability/low risk trade.

Market Flash

With crude oil in retreat this morning, Barclays is moving lower with the FTSE. If the kiss is genuine, I expect a scalded cat bounce down away from the centre tramline.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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.