Chart of the week: Targeting 20% upside for this share

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Chart of the week: Targeting 20% upside for this share

Has Anglo American finally turned?

Sentiment has turned bearish against the big miners in recent months. With South Africa announcing big changes in share ownership rules, shares in Anglo American (AAL) moved lower. But have they completed a normal bull market correction and ready to power higher? Let's look at the evidence.

Recall last year I turned bullish on the grossly oversold miners very near the lows, but underestimated how high the relief rally could stretch and took some profits way too early. Luckily, I held onto part of my position using a 'just in case' rationale.

So, has the five-month correction run its course - and, importantly, can I top up my holdings?

For perspective, let's go back to the weekly chart. Here it is showing the savage bear trend off the 2011 highs. And that trend is in a clear five-wave impulsive pattern that conforms beautifully to Mr Elliott's Rules and Guidelines.

 

Although wave 3 is not longer than wave 5, it is 'long and strong'. Last week, I showed the chart of Randgold (RRS) which displayed a lovely example of the Guideline of Alternation, whereby waves 2 and 4 are often of opposing characters. Here, too, this Guideline is on full display with wave 2 being a simple A-B-C affair and wave 4 a complex wedge/triangle.

Also, wave 5 is a lengthy wave which is typical of commodity charts - and commodity-based share charts. When dealing with these markets, I am always on the lookout for extended fifth waves when appropriate. My reason? Simply because it is far too easy to call a turn prematurely - and catch a falling knife instead!

In fact, the plunge in late 2015 was a great time to get your fingers badly cut. With the shares trading around the £10 area in April, who could have imagined they would fall to the £2.20 level just a few months later - a collapse of almost 80%?

What investor would not have been at least a little miffed with this loss? And if they had bought shares much above the £10 level, the loss would have been that much greater. Ouch!

Personally, if I were in this position, I would have jumped ship early (that's what stop losses were invented for) and either sat on cash or looked for better opportunities elsewhere.

I never marry a position - it can be fatal not only to your wealth but your sanity. Traders are more into one-night-stands than devoted to life-long unions.

The rally off the low has been pretty much straight up - here is the daily chart.

 

That has created a fairly rare "V" low - and these are among the trickiest to trade from a technical angle. But with the high made in February, the market has traced out a pretty A-B-C correction right to the Fibonacci 38% level. Note that this has created a momentum divergence - and that heralds a possible reversal since it implies the selling power is drying up.

And on Friday, the market edged well above the short-term pink trendline in a bullish show of strength.

All of these factors are conducive to a bullish stance here with a target at the old highs in the £14 area with higher potential thereafter.

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.