Interactive Investor

Chart of the week: time to buy Gamma Communications shares?

13th December 2021 11:36

John Burford from interactive investor

Taking a slightly different approach this week, technical analyst John Burford has found an AIM stock he believes has limited downside and greater upside potential.

I am veering a little off-piste this week with this AIM-listed UK communications company. I normally avoid the smaller caps unless it meets a few important criteria. Gamma Communications (LSE:GAMA) offers communications solutions for small- and medium-sized companies and operates overseas as well as in the UK. It has seen some solid earnings growth data already but that has slowed recently.

The shares have had a somewhat roller-coaster ride (a typical path for small tech caps) but, at current valuations, it offers solid upside potential. The chart below is a textbook example of what I mean with downside seeming limited with greater upside potential.

Past performance is not a guide to future performance.

It has rallied from the early days around £5 to the all-time high of £24 posted last August and, since then, the market has retreated to the current £16-£17 range.

But note that this price lies at the Fibonacci 50% retrace of the entire rally off the Corona Crash low back in March 2020 – where many reversals are made. I believe that is a significant milestone.

Here is the daily chart:

Past performance is not a guide to future performance.

It also shows the decline off the all-time high has a clear three-down look to a huge momentum divergence at the 'c' wave low.

If this is indeed the low of the correction, then I expect a vigorous reversal consistent with the message that the momentum divergence represents a gradual shift from the dominant selling pressure to dominant buying.

Not only that but the current market is dipping into the solid chart support zone from July 2020 to April 2021. That is a lengthy period of consolidation and, provided an advance can start from around here, the bounce out of it should be strong.

Of course, the correction could dip a little further to the £14.50 Fibonacci 62% region from the current £16.50, which could occur if sentiment towards tech takes a major turn for the worse (which I view as unlikely in the near to medium term).

A reasonable first major target is the £24 record, with higher potential. Any hard decline below £14.50 would send me back to my drawing board.

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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