Chart of the week: Bullish on this FTSE 100 high yielder

Fundamentals scream value, and now our technical analyst expects a big bounce at this blue-chip laggard. 

I am going to bat for BAT   

This is surely one of the most unloved shares on the London Stock Exchange. Not only does the company carry the stigma of being an 'evil' addictive nicotine pusher, but the outlook for cigarette use is for a continued decline globally. Not a pretty picture – at least on the surface.

In fact, since British American Tobacco (LSE:BATS) made its all-time high at £56 in June 2017, it has currently lost about 60% of its value to the current low in the £23.50 region.  That makes it a candidate for my 'Buy Low/Sell High' list. So, let's dig a little deeper.

Here is the weekly chart since 2009:

Source: interactive investor   Past performance is not a guide to future performance

There are several notable features. First is the textbook purple five-wave pattern in red wave 5.  Second is the final wave 5 of 5 also rose into a momentum divergence, indicating a classic buying climax at the £56 high. Third is the decline to a precise hit on the Fibonacci 76% support level. Fourth is the clear five-wave pattern to the decline

At the high, that was a terrific opportunity to take profits on longs and reverse to short, anticipating a decline. That decline could be expected to be in the form of three waves and to last for months – perhaps even a few years. That is what Elliott Wave Theory projects.

Here is a close-up of the decline on the daily chart:

Source: interactive investor   Past performance is not a guide to future performance

Lo and behold, I have a textbook tramline pair where the line drawn between the highs of waves 2 and 4 creates the upper tramline and the parallel line underneath conveniently connects the lows of waves 1 and 3. So now, with those tramlines firmly in place, the market has descended in wave 5 right to this lower tramline. This is looking very pretty.

And note the huge momentum divergence this fifth wave has opened up! Look at the bounces off the waves 1 and 3 lows – they were both preceded by decent momentum divergences.  If history is any guide – and it usually is in technical analysis – we can expect a similar bounce here but much stronger than before due to the size of the current divergence.

If this is correct, I expect a vigorous rally phase to start soon with the gap as my first target in the £32 area.  Overcoming that level sets the upper tramline at around the £34 area as next target.  And, with a favourable wind, I can see the £40-£42 area being attained with higher potential.

But as one door closes, another opens up. With tobacco in decline, we have a new hot sector – marijuana. Rivals of BAT are already in that space and it would be a natural for BAT to join them (if they have not done so already). I am bullish on BAT at these levels.

For more information about Tramline Traders, or to take a three-week free trial, go to  www.tramlinetraders.com. 

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.