Chart of the week: is BT now poised for a major rally?

by John Burford from interactive investor |

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The communications giant’s share price shows the classic signs of a bear market ending, according to our chartist.

I last covered this bombed-out warhorse in May, when its shares had declined in a strong bear trend to the £1 region – a decade-old low. I made a case that odds heavily favoured a rally phase off this low that should last for weeks or months. 

Although the share price has gone absolutely nowhere since then, the evidence for a hefty advance now has grown much stronger.

This was the long-range chart I showed in May:

The key point from my wave labels is that we are finishing up the b wave prior to the start of the c wave up. This wave should at least go on to test the area of the a wave high around 500p.  If so, that places BT (LSE:BT.A) as a possible high-flyer.

Note also the very strong momentum divergence (lower red bar) indicating that as the b wave moved lower, the selling pressure became weaker.  When this happens, it is likely the shares are moving into stronger hands from the weaker ones that are disappointed by the suspension of the dividend until at least 2021-2022.

That makes the shares unattractive to income-seeking investors such as pension funds, but very attractive to capital-gains seeking investors.

With the technical picture appearing very favourable, as well as my high price target, I believe the shares are well worth a very hard look. And the wave pattern since May on the daily chart has bolstered my belief:

Since May, the shares have gone nowhere – but the how behind this tells an important story (to chart technicians, at least). In fact, the pattern is a classic five-wave ending diagonal appearing at the end of a massive bear market.  This is a textbook bear-market ending pattern.

Right now, the shares are poised to break above the upper diagonal line. When they do, my first target becomes the 150p area. Given the strong momentum divergence on this daily chart (to match that on the weekly), I expect my target to be reached quite quickly. I place low odds on new lows, but if so the shares are an even a stronger buy given takeover rumours.

Recently, we have seen the big-name tech shares coming off their perches (see my latest columns), so is this the time for value shares to shine? If so, then the old buy low, sell high investing method will really come into its own – at long last.

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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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