Interactive Investor

Chart of the week: are Ocado shares a buy now?

Our charts expert considers whether the accident-prone tech firm is worth picking at these low levels.

26th July 2021 12:00

John Burford from interactive investor

Our charts expert considers whether the accident-prone tech firm and online supermarket is worth picking up at these low levels.

Can a leading-edge company in the online grocery sector have as much bad luck recently as has Ocado (LSE:OCDO)

It has had three fires in three years with the latest a week ago caused by robots colliding. Yes, welcome to the brave new world of automation in the 21st century.

Naturally, this has adversely impacted the sentiment surrounding automated fulfilment and the recent sell-off in the shares is not a surprise. 

But has this set up another contrarian buying opportunity? Certainly, warehouse automation is not going away and although glitches along the way are to be expected, the trend for robotic low-skill operations in industry is firmly up. Robots don't get Covid!

This is the daily chart from last year:

Past performance is not a guide to future performance.

The shares made a high at £29 last September and the ensuing fires and other difficulties dampened the bullish outlook, and the shares fell back but then rose back to test the high.

But then, a worsening outlook culminating in last week's fire sent the shares down to last week's low at £17.50.

But that decline appears in the form of an a-b-c three down pattern with the 'c' wave hitting the important Fibonacci 62% support where reversals often occur.

Note the internal trendline connecting the minor highs on the decline – and the upward beak on 21 June. That was the first sign of a trend change to up.

The shares fell back and have now planted a 'kiss' on that trendline and is currently being repelled upwards in what appears to be a scalded cat bounce up. 

Remember, I use that expression to describe the action of the market when it kisses an important line of support/resistance (in this case, support) and moves sharply away from the kiss.

After the kiss, the market often moves away from it very sharply making the very best low risk trade entry as near to the kiss as possible. 

And the risk is low because a stop loss can be placed just under the low of the kiss. If we have a genuine kiss, the trade will be in instant profit from the get-go. And that is a superb position to be in.

But if wrong, you will know about it very quickly if the kiss low is taken out. You will suffer a minor loss in that event. That makes this kind of trade a low-risk/high-probability position.

My first target is the £22.50 area.

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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