Chart of the week: is Babcock set to regain former glory?

by John Burford from interactive investor |

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The defence contractor’s restructure could mean a significant upswing in share price, our columnist says.

Defence leviathan Babcock International (LSE:BAB) is now in the news, as its long-overdue re-structuring has been announced following years of severe share price under-performance.

For years, the shares have been relentlessly sliding off the £14.60 high in 2014 to the recent low around £2.

Past performance is not a guide to future performance.

This chart shows the sorry tale – the shares are back to where they were in 2006, but according to my wave labels are poised to make a substantial upward correction. The market is completing a three down off the all-time high and on a strong momentum divergence (that is even stronger when plotted on the weekly chart – see below). 

Remember, following a lengthy downtrend, a momentum divergence signals weakening selling pressure and often heralds an imminent trend reversal. The general rule is this: the stronger the divergence, the sharper the reversal.

Past performance is not a guide to future performance.

This is the weekly chart of the 'c' wave and the market has been following in the trading channel defined by my accurate tramlines and appears to have completed the required five wave pattern. Note the huge momentum divergence at the £2 low.

Last week, the shares jumped on the company news and seems to have kicked off the trend reversal. My first target is the upper tramline in the £4 region and after that, I have a £6 target with higher potential. Only a move below the £2 level would prompt a re-assessment.

I am putting it on my ‘buy low, sell high’ list.

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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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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