Chart of the week: Are BT shares set to rally?
Down two-thirds from the 2015/16 high, BT is now looking like a classic setup for a reversal higher.
16th September 2019 12:57
by John Burford from interactive investor
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Down two-thirds from the 2015/16 high, BT is now looking like a classic setup for a reversal higher.
This old warhorse (BT Group (LSE:BT.A)) has had its share of woes in recent months (years?) as pressure has built over the expected cost of rolling out fibre nationwide. That has made them a very attractive candidate for my Buy Low/Sell High list. But more than that, the charts are telling me they are due a significant correction, at least.
Here is the weekly chart showing the carnage over the years:
Source: interactive investor Past performance is not a guide to future performance
From the 2009 Credit Crunch low, they advanced strongly from the 70p Bargain of the Century to the 500p high set in 2015 for a superb 7-bagger. But note the critical form of that advance – it is a clear five-up, with the usual 'long and strong' wave 3. I can call that top as my large red wave 1 up. Elliott wave theory then said that the market would now turn down in a large correction in three waves.
With that knowledge, short positions were indicated with a price target of at least the Fibonacci 62% retrace at around the 250p area. But, in fact, the selling became so intense that that level was easily breached, and they descended to the recent low at 159p set in late August – right at the next Fibonacci 76% retrace area.
The form of the decline can be counted as a corrective a-b-c. But note the huge momentum divergence at the low. This always indicates selling pressure is drying up into the low. So, this is a classic setup for a reversal higher.
Here is a close-up on the daily:
Source: interactive investor Past performance is not a guide to future performance
The decline has been travelling inside my tramline pair and, once again, we have stark momentum divergences. Note how the first one was prelude to the strong rally phase to the wave 'b' high last November. Will the second one tell a similar story?
If so, I expect a rapid run-up to my first target area at around the 250p zone. The recent low at 159p should hold but, if not, I would consider moves under this area as an even better opportunity to catch the bottom of red wave 2 that should lead to a 'long and strong' wave 3 up. I have a higher target at 340p.
John owns shares in BT Group.
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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.
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