Chart of the week: start of a strong rally phase for this stock?

Our technical analyst believes this is a low risk trade that could return 25% or more in time. 

Is Fresnillo a Buy here?

Is the enforced isolation due to the plague getting you down? While most are going quietly along with the government’s ‘advice’ (aka orders) to stay indoors, anger is mounting over its failure to prepare for the current pandemic, as other countries (notably Germany and some Asian nations) have.

But as a trader who tries to understand – and anticipate -the markets’ moves ahead of time, following the virus news is a dead end to profit-making.

In fact, the appearance of the coronavirus was the perfect final insurmountable Wall of Worry that the debt-fuelled markets and economies ran slap bang into.

Last year, all Walls of Worry were never too high for the exponentially advancing markets to steamroller over. But now, markets are declining hard in a Slope of Hope.

It’s a totally different environment.

But do I have a light at tunnel-end that is not an approaching express train? I may have one in Fresnillo (LSE:FRES).

This silver-mining stalwart of the FTSE 100 is an old friend of COTW.  I last covered it on 13 January where I took a bearish stance. 

• Chart of the week: Fresnillo, gold and silver

This was the chart I showed then:

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

The blue trendlines are the edges of my Fresnillo Wedge that dates back to 2016.  The shares were already in a downtrend within this wedge and, in January, I projected a decline to at least the lower line as clearly shown in the chart.

This is what I wrote in January as the shares traded at the £6.24 level:

“So unless they can push up above the £17.50 level, which I consider unlikely, I maintain my bearish outlook.  In fact, I expect silver prices to trend lower this year”

In fact, they have trended lower, but in an erratic fashion. Note that this was contrary to majority opinion that held that gold and silver would be havens of safety in the new world of falling share prices.

Surely, Fresnillo could not decline in value?

But it did – here is the  updated weekly chart showing the extent  and beauty of the Wedge:

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

And the decline continued into mid-March when they tested the lower wedge line at £4.60 but on a strong momentum divergence (lower arrow). That gave a clue that the wedge support would likely hold.

And so it did, with the shares pushing strongly above the wedge line on 24 March.  So, is this the start of a strong rally phase?

With the shares now back testing the upper wedge support line around the £6.50 area, I believe there is a low risk trade waiting with the shares poised to advance to at least the £8 area with the £9 region as a distinct possibility, while £11 is not out of the question in due course. Only a move below the £5 level would send me back to the drawing board.

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.