Chart of the Week: Take profits on this bank before the market turns
28th July 2017 09:48
by John Burford from interactive investor
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Standard Chartered nearing end of relief rally
has taken a battering in recent years. I last covered it on 22 May when I entitled the article: 'STAN is riding my waves' and I could just as well use the same title today.
In fact, my wave analysis in May was spot-on - and demonstrates how, by using only basic Elliott wave theory, you can stay well ahead of the crowd and produce forecasts that are remarkably accurate.
In May I showed this long-term chart:
The terrible bear market of 2013 to 2016 - taking the share price from £18 to a low of £3.70 in early 2016 - produced a massive loss of value of a staggering 80%. Now, this is (or is that 'was'?) a "widows and orphans" holding - a major bank, no less - and acted more like a pump-and-dump tech start-up on AIM!
But the form of the decline is a textbook five impulsive wave. Wave 3 is the typical long and strong wave and wave 5 contains its own internal five-wave pattern. And when the market moved below the £4 level, I noted a building momentum divergence (red bar) where the selling pressure was drying up as prices declined.
That is one of the tell-tale signs of an imminent trend change in the fifth wave - and so it proved. The market then started a relief rally and in May had broken above the major blue trendline in wave A of what I believed should be an A-B-C rally.
This three-wave form is the standard response to a major five-wave trend. With this knowledge, I could make a firm forecast that when wave A ended, there would be a turn down in wave B and then a move back up in wave C, which would normally end above the high of wave A.
So in May, this was my tentative forecast on the daily chart:
The move off the A wave high was in three (purple) waves and that meant wave B may have ended at the £6.80 level and the market was taking off in wave C.
Was this forecast correct? Here is the daily chart updated:
I was right - wave B did complete and make a turn right at the Fibonacci 62% support level at £6.80, which was a textbook area to take a long trade at low risk.
Now, with the market moving sharply higher, it has moved above the A wave high, as forecast. Isn't that pretty?
So now, having fulfilled the forecast, the market can turn down at any time. Remember, this is a relief rally in an ongoing bear market and the rule here is: never over-stay your welcome! When the market turns down, it can turn viciously. My strategy in these situations is to take partial profits when a target has been reached (as here) and keep raising stops on the remainder as the market moves up.
In the unlikely event the shares will scream higher, I have banked a profit and have an open position gaining ground until my stop takes me out. That is the professional approach and I recommend it to everyone.
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