Interactive Investor

Chart of the week: A blue-chip trade develops

5th December 2016 12:08

John Burford from interactive investor

Today's Italian referendum 'No' result was greeted negatively by early markets, as was widely expected. As I write, stockmarkets are recovering from these early setbacks.

When short-term trading, I like to observe the action over the following day or so to get a fix on whether existing trends have been turned or not.

It is so easy to be whipsawed to death in the early frantic action and is generally best avoided. Longer-term traders/investors will be sitting on their hands.

Is it still wise to hold Sage?

Shares in Sage have come off the boil recently and my heading asks a very pertinent question. I have been covering this remarkable bull story for many months, with the last update on 1 August

I noted then that the multi-year rally was accelerating in an exponential manner, and this was the monthly chart I showed in August:

One note about the use of charts. Many of us are so wrapped up in the minor squiggles on the daily (and even hourly) charts that we often forget to keep the monthly and weekly charts in mind.

This is a big mistake, especially in trending markets such as this one. Remember, it is the longer-term trends that take precedence.

I am a firm believer in getting on board a trend early in its development, riding it as far as is humanly possible - and then getting out with a big win. That does not mean trying to pick top tick to exit (a futile exercise, and one that lures and traps many). No, a trader/investor must have a reliable system or method for picking his or her exit points.

All long-term investors need to monitor their holdings at least twice a monthYou certainly do not want to get out too early on a minor set-back (easy to do when just working with the daily charts).

So if your focus is on trying to ride the potential "big winner" over several years, the weekly and monthly charts need to be updated once a week or so.

Also, you certainly do not want to see a major win that has taken you months and years of work to accumulate to turn into a loss by just putting the shares to the back of your drawer and forgetting about them. All long-term investors need to monitor their holdings at least twice a month.

Shares are not set-and-forget investments. I know too many instances of investors failing to take a big profit on a holding only to see the gain disappear in the next big bear market (while they were asleep at the wheel).

Back in August, and because the rally was getting extremely exuberant, this is what I wrote:

"Whenever we see such an exponential rise, we can be pretty sure of one thing: When the rocket has run out of fuel, the decline will be equally rapid.

Outlook

"Traders/investors who wish to adhere to the 'buy low, sell high' school should start looking at an exit strategy from now on, but the eventual top may be some distance away."

In August, the shares were trading at the £7 area and my suggestion was to start looking for an exit strategy.

Now, there are many good methods for taking long-term profits out there, but the one I favour is the following one, based on the wave patterns.

Here is the recent daily chart:

Fortunately, Sage adhered to my lovely blue tramlines on the way up and when the shares hit the 760p level - and my upper tramline - in early October, I noted that the push was weak, as demonstrated by the very large momentum divergence at the high.

That is always a severe warning to me to start looking for further weakness and to get ready to exit.

And I did not have to wait very long, because by then I could draw a lovely minor tramline (in pink) across the minor lows in the August-October period. I figured that a downside break of that would give me my sell signal. And so it proved - and gave me my exit point at around 720p.

Odds favour a bounce from near current levels to perhaps the 700p area, where it will hit resistanceThe whole point of a momentum divergence is that when it occurs at market highs, it is a sign that the shares are being transferred into weaker hands (who have less buying power than the funds), and any minor setback would induce many to sell to cut losses.

With that break, the selling became intense (weak hands selling) and this is entirely typical of third waves. That made my Elliott wave labels for the entire move down very clear.

Last week, following the wave four rally, the shares plunged once more in wave five to meet my lower blue tramline support.

Now the shares are on a major support line and there is a momentum divergence between the third and fifth waves. Normally, this would indicate a decent rally lies ahead, but we do not know for sure that the support will hold - this fifth wave may have further to travel.

Outlook

Odds favour a bounce from near current levels to perhaps the 700p area, where it will encounter resistance.

Depending on the wave patterns to develop, that may be the high and a break of the wave five low at 630p would signal a steeper decline.

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.

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.

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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.

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