Interactive Investor

Chart of the week: A FTSE 100 bank trade

4th December 2017 11:50

John Burford from interactive investor

Standard Chartered still in major bear trend

Regular readers know that I favour trades that I believe have a low risk of initial loss. In general, that means I look for rallies to short (or exit longs) and dips to buy (or cover shorts). But sometimes, a sharp break of a line of support/resistance will induce me to break my rule and sell a decline and buy a rally.

Last week's chart on GlaxoSmithKline was a case in point:

The hard break of the major blue trendline and of the yellow support zone were clear shorting signals.

But these hard breaks often result in snap-back rallies that can take you out of your position on your protective buy stops, subjecting these types of trades potentially at a high initial risk of loss.

For most traders, I recommend the safer former approach.

And here is a great example of this low risk approach in Standard Chartered - a stock I have been following here for some time (and on which I have been consistently bearish).

And this is the reason on the weekly chart:


The shares were in a persistent decline to the February 2016 low which was marked by a huge momentum divergence (red bar) - a clear sign to expect a good-sized relief rally, which duly materialized.

Note the slope of the rally in 2017 was far weaker than the slope of the previous decline - the sure sign of a counter-trend relief move, rather than a new strong bull market.

Traders who recognised this were prepared for a major turn back down when the C wave topped. And the point where it topped was a dramatic demonstration of the power of market memory and of the Fibonacci sequence.

In fact, the rally carried (in a clear three counter-trend waves up) to the precise Fibonacci 62% retrace of the previous major wave down. And that was also the point of the 2015 low (these points are usually points of chart resistance. Note that the C wave high of August 31 at the 860p level was set 2½ years after that low - a colossal feat of market memory! (Yes, markets do have memories - and long ones at that).

A short trade at around the 860p level could be protected by a very close stop loss, giving us a very low risk trade.

And from that high, the market has declined to the current 730p level. But were there any other low-risk trades on offer on the decline?

Here is the daily chart of recent action off the C wave high at 860:


The decline has been pretty orderly, but when a low was put in on 25 September at 715p on a huge momentum divergence, I knew a decent relief rally was in store, hopefully in a three wave A-B-C pattern to either the most favoured Fibonacci 50% or 62% levels. I would be looking to enter new short trades there.

As it turned out, that was entirely the correct diagnosis and the C wave terminated at the 50% level again on a strong momentum divergence (which again presaged a sharp decline). Remember, my rule is the larger the divergence at turns, the sharper the move. That was an excellent low-risk opportunity to short again at the 780p level.

Last month, the shares dipped to the 697p level and are currently in an A-B-C relief pattern that has carried to the Fibonacci 62% retrace of the move off the C wave high on the above chart. That was another excellent low-risk shorting opportunity at the 750p level.

To sum up: we have had at least three excellent low-risk shorting opportunities since August 31 - at the 860, 780 and 750 levels. All are in profit to date.

My best guess is that the shares will continue lower after perhaps a small bounce, and a break of the lower blue tramline in the 700p area would really knock STAN for six.

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