Interactive Investor

Chart of the week: should you buy ITM Power shares on this dip?

28th June 2021 10:45

John Burford from interactive investor

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This share has been one of the most popular on the stock market. Here's what our chartist thinks of prospects right now. 

This UK company is at the forefront of the nascent hydrogen industry which is one of the hottest 'green' tech sectors today.  Many have written about the processes involved but, as usual, my interest is in the charts – and sentiment.

ITM Power (LSE:ITM)  is developing fuel cells for motive power but this is not a brand new revolutionary technology – it has been around a very long time. I even remember learning about hydrogen fuel cells in a chemistry class at school.

For trading, liquidity is high and appears to be deep enough to qualify in my book as a candidate for trading and investing. It is listed on AIM.

Pre-January 2000 when the possibilities for producing and using hydrogen for motive power started entering the mainstream, the shares were trading peacefully around the 20p to 30p region, making it a true penny share going nowhere. 

But then, the word gradually spread that maybe hydrogen is a fuel of the future (despite it being one of the oldest and the simplest atoms in the universe and powers our sun). Maybe it could be produced economically from the electrolysis of water after all.

Last year, the shares rapidly advanced to 160p and then 360p, and then exploded to 720p in January in a series of five waves. But then, doubts as to the profit potential crept in and the shares plunged to a low of 310p in early May. 

This is a typical course for a hot technology – boom and then bust (and sometimes boom again). The initial enthusiasm is invariably overdone and reality dawns in a Wile E. Coyote light-bulb moment.

The whole drama can be seen in my daily chart where I have marked my Elliott waves:

Past performance is not a guide to future performance.

The rally to the January high is in a clear five waves, and I have marked that wave 1 of a larger wave to come. Then, the correction occurred in three waves to the May deep low at 310p which is a precise Fibonacci 62% retrace of the entire rally off the pre-2020 lows. Seems like it was pre-ordained, doesn't it?

In other words, this is an absolute textbook example of a five up, three down pattern to a Fib 62% retrace from where the advance can be revived.

With Friday's strong impulsive push up to 435p, odds are very high the bull has re-appeared. My first major target is the 'b' wave high around 550p and then on to the old high above 700p. Only an unexpected sharp decline below 300p would cancel out my forecast.

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.

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Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

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