Interactive Investor

Chart of the week: An upside surprise

3rd April 2017 10:59

John Burford from interactive investor

Randgold tests significant support

The precious metals have been on a tear since making lows mid-December and, of course, the big miners have been following suit. In particular, Randgold has rallied from £54 to £76 since then - a tidy gain of 40%.  

Of course, many bulls are expecting much more upside as they sniff a hard stockmarket correction is only a whisker away - and the flight to the safety of gold would be tsunami-like.

In the sense that almost any conceivable scenario is possible in the financial markets, not all are equally probable.Yes, we have all heard of massive home runs in a few markets where the Black Swan flew in and suddenly landed. But to base a trading/investing career on the hope that some miracle of probability will produce ten-baggers regularly is somewhat fanciful in my humble opinion.

Many newcomers try their hand in the penny stocks arena (with limited resources) - and are usually carried out on a stretcher with their accounts mortally wounded just as failed gladiators were in Roman times.

I prefer to trade markets only where I judge the odds are firmly on my side - and that is in large-cap shares with history. In small-cap shares, the odds are vastly increased for nasty surprises, such as the CFO running off with company funds, or a dud oil well or poor mine assay result.That often results in large opening gaps the next morning - and a painful fill order made way past your intended stops.

But something curious has been happening to the accepted gold/share market relationship in recent days. Stocks have been falling during March while gold has been rising (in the usual risk model), but Randgold has not tagged along with the metal.If gold is rising because of a shift towards a rising fear of a large stock market correction, surely Randgold would benefit?

I last covered the shares on 20 February and this is the chart I showed (view here).

I noted the very strong rally to T3 and the Fibonacci 50% level, where I usually expect some consolidation.My arrow is somewhat misleadingly positioned because the work around the £70-£74 area would likely be lengthy, as befits a solid zone of resistance represented by the confluence of the important Fib level and the tramline.

And, in fact, this consolidation has been working for a month now - here is the chart updated:

 

From the 27 February high the market has fallen back, then rallied and is currently in a dip. I am able to draw in tramlines to this rally where trading has been confined to the trading channel between them.The downside break came on 8 March and that signalled the consolidation would very likely continue for some time.

So, now, there are three waves off the high and we are presently in wave C down that appears unfinished.That to me is the most likely scenario.

If this is correct, what is the most likely point where wave C would turn? After all, if you can get a handle on that, you can judge whether it is worth riding any downturn with a short trade, or when is the most appropriate place to enter new buy orders.

I have drawn in T3, and this morning the market is testing that support. But note the yellow bar - that highlights a significant zone of support and resistance in alternate periods.  

At present, the market is also testing that support in the £68-£70 area. So today, the market is resting on that major support. Will that support give way? That is the key question.

If it does, I have also drawn in the Fibonacci levels and, since we know that the 50% and the 62% levels are the most common levels for turns, my best guess for the C wave low is either the £65.50 or the £63 area.

And, if this occurs, I would hope to see a momentum divergence between the A and C wave lows. That would set up the likelihood of the rally picking up again.

But with the market now testing solid support at £69, I would not be amazed if the shares had a little upside surprise in store.

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