Chart of the week: Favourite share sends warning

A lesson in trading from Sage

Sage has been one of my favourite shares and now the chart pattern could be sending a warning that what happened to this share could also take place in the general market as measured by the FTSE 100. It is time to heed the lessons that SAGE has been sending us.

The last time I covered it was on 5 December, but before that I had noted that the chart was a classic powerful bull market where corrections to the uptrend were barely registered. In fact, for many years it was a veritable widows and orphans holding.

But its weak performance since last summer may be a clue as to what will befall the general market later this year. Along with the FTSE 100 index, many shares are likewise currently in a very strong uptrend. At some stage, this trend will turn - and the example of SAGE may provide a salutary lesson.

To recap the SAGE story: it had risen from the 150p post-2009 low to the 700p area by August. But the most remarkable feature was that the share price had gone exponential as vividly shown by the monthly chart which I published in December;

The slope of the uptrend had gradually steepened to a point where the acceleration was out of control. It was only a matter of time before the rocket would run out of fuel and start falling to earth. That is what happens to all such rockets.

Of course, most traders understand that and some will start selling their holdings or even start shorting the shares. But without a technical method for pinpointing a suitable place to do this, many traders act on a whim. But, as I mentioned recently, gut feel is no trading plan.

The shares did move up a little further into September and then traced out a lovely topping pattern where I could draw a minor support line (shown in pink):

This pink line contains at least five accurate touch points so that a downward break of it would very likely spell the end of the bull trend. That was a sensible place to set sell orders (at around the 720p level).

And, right on cue, the shares did take a big tumble on that break with the result shown in the above chart which was taken in December.

Of course, it is always useful to evaluate some likely downside targets in case you wish to take some profits on your shorts if you are a short-term swing trader. I had placed my Elliott wave labels on the above chart and reckoned the market was in wave 5 of a major leg down.

This is what I wrote in December: "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."

From the shape of the waves to that point, I was able to approximate the likely extent of the immediate bounce off my tentative wave 5 low - and that is shown by the red bars on the above chart. I reckoned the maximum upside would be in the 680-690p area before turning down again.

And that was a highly accurate prediction - here is the updated daily chart:

In January the market did indeed rally and made it to the 680p level on the button. The market then turned hard down to plunge below my lower tramline support. Now that action caused me to slightly amend my wave labels to those shown.

And that is another lesson in trading. We are always dealing with possible wave labels and tramline placements in real time, and these could be amended in the light of subsequent market action. This is a good example. I have also slightly modified my blue tramline placements for the same reason.

So, in January, the market was in its final fifth wave. Where was it likely to turn back up? That is where my Fibonacci levels come into their own again. I noted that 600p was the Fibonacci 38% level of the large rally off the major low in early 2015 - and that was a great candidate for the wave 5 low. Shorts could be covered there, of course.

Now that the market has recovered from the Fib 38% support, it is now testing the support/resistance of the lower tramline. Here is the weekly:

But, with the clear tramline break, a lot of damage has been done to the bull trend. With this now two-way market scenario, I expect the shares to remain range-bound for some time - and there may be better opportunities elsewhere.

At the least, shorts taken at the 720p level can now be protected by moving stops to that entry price.

From a solidly bullish outlook last summer, the market suddenly turned down and gave a classic sell signal at 720p. Now, the shares could be poised for another leg down. And could this action be mirrored In the FTSE a little later on this year?

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.