Interactive Investor

Chart of the week: A 'major' trading opportunity

11th April 2016 10:54

John Burford from interactive investor

Is Petrofac on the launchpad for takeoff?

In common with others in the oil services sector, Petrofac has fallen on hard times as the market price of crude oil has fallen and investment in exploration has been severely curtailed around the world. But I believe this offers a major trading opportunity.

Here is the weekly chart, showing the decline off the 1,780p high four years ago to the recent January low of 650p. The decline takes the form of an A-B-C three-wave corrective pattern, indicating the next large scale move is likely to be up.

The decline has carried to a highly accurate hit on the Fibonacci 78% retrace of the entire rally off the 2009 low.

Not only that, but the decline is in the region of the chart support provided by the important high in 2008 (red arrow, above), as it proves once again that markets have very long memories.

I have drawn in tentative tramlines in blue off the 2012 high. These are pencilled in at present because both have only two touch points, which is one fewer than necessary to consider the lines as reliable lines of support and resistance.

Nevertheless, the market has rallied in two waves off my C wave low and is currently staging an attempted rally above the wave one high, which would be a significant event.

Here is a close-up showing several important features. There are a few gaps on this daily chart, and the point to remember about them is that they tend to get filled in eventually.

That is true for the latest gap, but not so for the two earlier gaps. That makes them targets for the current rally.

Under this scenario, closing the gaps would propel the market above my upper tramline in a third wave. Third waves are usually long and strong.

The key to look for is a rapid rise from near current levels which would confirm the third wave idea.

But if the market fails to stage a solid rally and stalls out, the waves off the low would then be a normal A-B-C counter-trend rally, leading to a renewed slide.

Here is an even closer look on the hourly:

Within the rally, I have a tidy four red waves of what should become a five wave advance. The third wave is a very strong thrust and the current fourth wave is a series of overlapping minor waves, strongly suggestive of a corrective phase.

This fourth wave has carried to the Fibonacci 50% retrace of the entire rally, which is a typical turning point. I can allow for a further dip to the 62% level to keep my bullish scenario. Any moves below the 800p level would be problematic.

Outlook

Provided the market can continue the budding rally phase and break above my tramline, the shares are in prospect for a big advance. My first target is the 1,150p area, which would close an important gap. If crude oil extends its rally to the $60 area (my long-standing target) then higher values are very likely.

Update on Mondi

I covered this FTSE share a few weeks ago and was bearish on it. The Mondi chart showed signs of rally exhaustion:

The rally off the January low (which was where my lowest tramline support was located) has an A-B-C feel, where the final high was made on a large momentum divergence. This is always a sign that the motive pressure was failing and to expect a reversal.

This was shown in dramatic style last summer as the market moved into new highs, which was my long-term final wave five. The momentum divergence was likewise a signal to expect a reversal.

Not only did the 17 March high retrace to the precise hit on the Fibonacci 62% level, but it planted a solid kiss on the major tramline resistance. Whenever I see this combination, I get really excited because I know that this is an area of major resistance - and provides me with an opportunity to enter a short trade at very low risk.

That is because I can use a very close protective buy stop here to limit loss in the event that the market has sufficient power to crash through that resistance.

Here is a close-up of the action:

Following the kiss, the market made a strong move down, confirming the strength of the resistance at the 1,400p level.

Outlook

Provided the 1,400p level holds, the bear trend should resume and a test of the lows around 1,150p is in prospect. But the decline off the August high has only an A-B-C form so far, and that means a rally above 1,400p would indicate a more powerful rally phase was in place.

The 1,400p level is crucial to the bearish case, but odds currently favour a bearish scenario.

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