Chart of the week: A 34% profit in three months. What now?

In a terrific example of great timing, our chartist called the bottom of this blue-chip. Here’s his updated tip.

Is Barclays still a Boris Buy?

In my 9 September COTW: Is Barclays set up for a solid recovery now?, I asked if I should reverse my strongly bearish stance on the UK banks, particularly Barclays (LSE:BARC).  I had been reaping big rewards on the short side as sentiment became progressively more bearish. But the charts were telling me perhaps the trend was reaching the end of the line and I had better start looking for a buy entry – and cover shorts.  

Of course, the bearish story made a lot of sense with earnings from loans at tight margins as central banks were hell-bent on lowering short rates to ‘stimulate’ economies.  In fact, I believed the central bank action was really another punishment for the ‘too big to fail’ banks that many said brought about the Credit Crunch of 2008.  That, in addition to the PPI affair that drained banks’ capital- and restored some wealth back to the public.  Not to mention the doom-and-gloom surrounding Brexit being a real negative.  No wonder bank shares were shunned (but they still remained ‘too big to fail’!).

Just as it is usually darkest before the dawn, major lows are always and everywhere made when things look really bad.  Of course, very few understand (or can guess) the detailed mechanisms that would improve sentiment after the lows – and hence raise the share price. But that is exactly what happens there as if by magic – and by reading the charts (more magic!), you can have a pretty good clue that a reversal is nigh.

And that is what I concluded on 9 September when I wrote:  Finally, the ECB meets this week and most expect it to lower its policy rate below the minus 0.4% currently prevailing in order to juice the flagging EZ economy.  But what if they make no changes, or just a small adjustment?  EZ bonds should go nuts (to the upside) – and EU and UK banks rocket.

Here is the chart I showed to back up my case:

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

The blue lines delineate a large Wedge and in August, the shares plunged below it.  I surmised then that this might turn out to be an ‘overshoot’ or selling climax, with short term rates plunging to new lows.  The pundits were convinced they might even go negative.

In a terrific example of great timing, the actual low was at £1.35 on 28 August – a mere 12 days before my COTW.  One factor that suggested the major low was in this area was the very large momentum divergence at the low on the short term charts. To me, the downside risk was low and yet the upside potential great as a bout of short covering would likely generate large gains very swiftly.

And this is the updated chart:

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

And with great timing I nailed the low, confirmed the ‘overshoot’ as the kick-off  to a surge, and Friday’s Boris Bounce has broken above the upper wedge line on Friday.  The shares are up 30% and have performed exactly as I forecast (as a rocket).

OK, is there any more upside?  Good question!  We could well see a pull-back (to perhaps the upper blue trendline), but the main trend now appears up.  Of course, short term traders should be looking at locking in at least some great profits here.

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.