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Chart of the week: How to play this successful trade
By John Burford | Mon, 20th March 2017 - 10:34
Trading Prudential was very prudent
In my COTW of 18 July last year, I suggested Prudential (PRU) was an excellent buy candidate. Not only were the chart patterns appearing encouraging, but sentiment had turned bearish as the company was believed to be barking up the wrong tree in going after emerging market insurance/pension business.
If you recall, because commodities were nose-diving, it was believed emerging markets would suffer big-time, and who wants to buy insurance when out of a previously well-paying mining job?
But because fundamentals such as these do not drive markets, I was looking for a reason to be bullish - and found plenty in the charts.
Here is the long-term weekly chart I showed then going back to the March 2009 Credit Crunch lows:
I noted the clear Elliott wave pattern where the 2012-2015 bull run was a textbook wave 3 because it was long and strong with very few pull-backs. That is the very definition of an impulsive wave (that is a wave that solidly travels in the direction of the one larger trend).
As that wave topped in March of 2015, it then declined in wave 4 which was a typical three-wave A-B-C, taking it to a low at the Fibonacci 38% support level. That was a terrific place to enter very low-risk buy orders, of course. But you would have been buying when the mood was bearish (if you read the media reports). Most traders/investors are unable to do this.
And that is a great lesson in using the media to direct well-timed counter-trend trades. As you know, that is what I use the financial media for - to get the measure of extreme sentiment. When I believe the mood is as bearish (or bullish) as it can get, I start looking for a trade against that mood - and usually find one.
From that C wave low in February and another test in June at the £11 level, the market started its final wave 5 rally phase. When I got to it in July for a COTW, the market had already started up and this was the daily chart I showed:
This is what I wrote then: "So now, the market is edging up towards the trendline and will meet it at around the £14 level. And then on to new highs above £18."
I was relying on the counter-trend nature of the A-B-C wave 4 pattern and odds were very much in favour of a move up past my blue trendline of resistance. I had set a target at the £18 level.
So let's see what progress PRU has made towards my target since July. Here is the updated daily chart:
It didn't take long for my second from lowest tramline to be penetrated in a clear confirmation of my bullish stance. And in true textbook fashion, we had a few pull-backs to that line of support (was resistance) in a series of kisses. The sheer fact that the resistance held on every kiss told me that my tramline was a valid line of support now it had been broken to the upside, and to expect a sharp move up.
And, in another clear bullish move, the shares moved sharply high in December. But by then I had the chance to draw in T3, which is the equidistant tramline that sets a target for prices to reach. And after a brief pull-back in January, the shares surged on to hit my £18 target on 17 March with a high so far of £18.01.
Of course, you have the option of taking full or part profits at these targets if you wish. Most though would prefer to stay with their positions because their confidence is being bolstered by the very bullish recent action - and why not let your profits run? After all, that rule is taught on the first page in any 'How to invest' book.
But, as we all know, markets make major turns when overall confidence is extreme (see above). That little piece of information should encourage everyone to start looking for an exit, even though they personally are feeling mighty good about their shares.
Traders/investors with poor discipline will say: "No, this time is different - I'm sure there is plenty more to go for". And they rationalise this by quoting one guru or another who conveniently spins a very convincingly bullish story from the data/news. And, as the market gives back their hard-won gains, they still cling to the bullish rationale - but secretly regret not taking profits when they had the chance.
Those with high discipline will look to exit positions at or near their targets - and move on. Others will keep a trailing stop moving up so as to capture most of the gains in any pull-back. This latter policy has the advantage of keeping you in the trade if the market goes crazy and climbs vertically!
What type of trader/investor are you?
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.