Chart of the week: This FTSE 100 stock could bounce

by John Burford from interactive investor |

The sector has come under pressure, but this technical analyst is bullish on this blue-chip.

I am still going to bat for BAT

I started covering this high yielder of the FTSE 100 - British American Tobacco (LSE:BATS) - back on January 28 when I stated that the recent low at the £23 mark most likely was the major multi-year bottom and that the shares should start a multi-month/year rally phase from there.

I considered it a terrific candidate for my Buy Low/Sell High list.  Crucially, I maintained that the downside risk was very low.

I then followed its upward progress in my COTW of April 1 and then May 28.  

This was my roadmap in May as it had hit a major target at the £32 area on my upper tramline:

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

Since then the shares have basically gone nowhere as it has consolidated its gains. 

Very often, when shares are doing nothing, investors/traders tend to take their eyes off it.  And when there is some 'negative' news, they are tempted to lose faith and sell out.  That can be a big mistake.

And such has been the case for the tobacco industry as the nascent vaping sector has recently come under fire in the US for possible harmful-to-health side effects. Duh! Amazing!  Consuming nicotine is harmful? Pull the other one.

Sarcasm aside, the news has cast an even greater pall on the tobacco giants, especially Imperial Brands (LSE:IMB).  And the proposed US merger between Altria (NYSE:MO) and Philip Morris International (NYSE:PM) hasn't helped sentiment in the sector one bit.

But while Imperial is plumbing new depths, BAT has resisted the downward slide.  

Here is the updated daily chart:

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

Since May, the shares have consolidated inside a lovely (pink) wedge that contains five clear waves, with wave 5 put in last Wednesday at the £28 level.

And that fifth wave is my new red wave 2 low (amended from last May's scenario). Incidentally, placing Elliott wave labels in real time is always a work in progress and is subject to amends depending on the market action.  This is a good example.

So, if this is the correct roadmap, we should be starting a strong wave 3 up to push first out of the wedge and then to my first target at £34 and then £40-£42, which are my original targets.  Supporting this view remains the very large momentum divergence into the January purple wave 5 low.

The bottom line: I remain bullish on BAT against the £27 low.

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.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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