Interactive Investor

Chart of the week: A low-risk FTSE 100 trade

9th October 2017 11:47

John Burford from interactive investor


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Sky is under a cloud, but are the shares now a buy?

The proposed Sky takeover is still very much up in the air (sorry!) which is where the shares ascended to on the announcement back in December. But with the clouds over its referral to the Competition and Markets Authority, the shares have fallen back to earth somewhat. But regardless of the bid's success or not, can the shares still mount a rally?

Here is the rather Everest-looking long range chart that shows the manic antics

That little episode encapsulates why I do not believe in the 'buy and hold' approach to investing (and certainly not to trading). Imagine buying the shares before 1999 at around £4, seeing them zoom up to the £20 area to give a magnificent 400% capital gain windfall within a few months – and then see them fall back to £4 again in 2009. That is a classic buy and hold failure.

If you are like me, then you would be a tad disappointed (unless you had a 20-year-plus horizon – and who has one that long?).

As the bubble burst, the shares headed south and only reached its low in the Credit Crunch wipe-out of 2009. Along with the general market, the shares began a steady recovery and made a high at the £12 area in July 2016 which I have labelled the A wave.

The decline off that A wave high is my wave B and took the shares to a Fibonacci 50% retrace of the A wave at the £7.50 level in December when the bid approach was made.

That bid sent the shares soaring to the £10.50 level in one day. As the very reasonable doubts over the success of the bid grew, the shares have drifted back to the current £9 region. Here is a close-up of the action this year:

There are several important points to note here. First, volatility has very much reduced with daily ranges much tighter than they were before the bid. This indicates lack of investor interest in buying or selling – and a potentially bullish sign, especially following this rather lengthy nine-month correction phase.

Second, the decline can be considered a corrective A-B-C with the C wave potentially ending at the Fibonacci 50% support level at £9 - a typical region where corrections to the main trend end.

The pink trendline is a line drawn off the £10.50 high and lies just above the next resistance level.

This presents us with a low risk trade because, if it fails, the risk to a stop-loss placed just under the £9 level is low. My first target is the pink trendline in the £9.60 area. And if this resistance can be overcome, I have a higher target in the £11-12 area on the underside of the lower tramline on the top chart.

But even if the shares have another dip in store, the next support level is the Fibonacci 62% at around £8.60 where a similar trade could be made.

Many traders/investors enter a trade without stop-loss protection. This is akin to believing their trade is a 'can't lose' proposition, such as a tip on a sure thing horse. Sadly, there is no such thing and all forecasts about the future must be looked at as probabilistic events.

One of the general rules of the markets is that when bullish sentiment towards an outcome becomes extreme, that is when it is wise to head for the doors – as the left-hand side of the top chart amply demonstrates. And when the market drifts and turns quiet – as here – upside 'surprises' often result.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. 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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