Chart of the week: A big money trade

AstraZeneca hits my target

As a leading big pharma company, its shares have been swinging over a wide range in the past few years as is typical for risk-taking companies – and that is the kind I like!

There are many FTSE 100 shares that trade over modest annual ranges (such as the utilities) and so they present slimmer pickings for spread betters than the 'racier' issues. In general, I much prefer to trade this latter category.

I covered AstraZeneca on 3 January at the start of the new year and noted the very juicy setup in the chart. Here is that January chart:

The initial reaction to the June Brexit vote was to sell. But, in common with many other issues, that attracted huge buy orders and the market shot high above the trendline. A buy stop placed just above that line in the £41 area would have been well rewarded.

But with news of drug test failures hitting the headlines in the winter, the shares were hit hard and, by late December, had fallen from the post-Brexit euphoria high above £54 to a low of £40.

However, as I wrote in January, "But one glance at the chart told me the decline was likely to reverse.

"Why was that? Simply because the decline is in a textbook A-B-C three waves down and three complete waves is always corrective (that is, the decline is a correction to the main trend, which is up).

"Also, there was a slight overshoot of the 'last chance' Fibonacci 78% support level but there was an accompanying large momentum divergence which told me that the selling pressure was rapidly drying up. Odds for a trend reversal at the 40 area were getting much stronger."

And there was another potentially bullish factor at play - if I extended the minor trendline from the March-July period into the future, I could count on that line being a line of support. It is well-known that lines of support/resistance can remain operative well into the future.

As a great example, here is the weekly chart of Standard Chartered that shows a lovely 3½-year trendline, which is a line of resistance

Note that all of the touch points are very accurate. The question is this: How does the market 'know' that 3½ years later, it 'should' back off the precise moment it hits the line from underneath? (Answer: Because markets have memories).

After I legitimately drew the line from the May 2015 touch point and extended it 16 months into the future, it still behaved as a line of resistance. That is, until that resistance was broken in December – and that was a buy signal.

A digital straight edge was all I needed to forecast the October 2015 bounce! No fancy (and expensive) robots or algos required.

Going back to the AZN chart, when the market dipped to the £40 level in December, it tested the support line which gave the market added support at that level. Going long at around £40 was a low-risk play. So what was a likely target to aim for?

This is what I wrote in January: "This morning, the shares have duly advanced off the support early last month to the 44 area – a gain of 10%. And if the budding rally can continue, I have a target set at the 48 area."

My target was £48 and that would be a decent profit from the £40 (or £44) area.

Here is the latest daily chart:

Bingo! Target hit last week and profits taken. Now I can move onto the next setup.

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John Burford is a freelance contributor and not a direct employee of Interactive Investor. All corre-spondence is with John Burford who, for these purposes, is deemed a third-party supplier. Buying, selling and investing in shares is not without risk. Market and company movement will affect your performance and you may get back less than you invest. Neither John Burford, Shareprice, or In-teractive Investor will be responsible for any losses that may be incurred as a result of following a trading idea.

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.