Chart of the week: are Micro Focus shares back from the dead?
Its decline was spectacular, but something has piqued analyst John Burford’s interest in these shares.
30th November 2020 12:32
by John Burford from interactive investor
Its decline was spectacular, but something has piqued analyst John Burford’s interest in these shares.
I have been tracking this former software high-flyer in its savage bear trend this year and believe it made a major low in early November. The rout has been so severe that it lost 90% of its value since July 2019.
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Usually, as a member of the ‘90% Club’, it qualifies as a prime candidate for the company scrap heap, but I believe this share is an exception and has potential to recover much lost ground.
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The latest report this month is encouraging in that revenues are still holding up, and Micro Focus International (LSE:MCRO) secured further backing in the form of low-interest loans. And, at last, the shares are moving up off their deep 4 November lows – here is the long-term weekly chart with the horror story (for the bulls) in full view.
Source: interactive investor. Past performance is not a guide to future performance.
There are several very notable features here – first, the collapse off the November 2017 high is in the clear form of an a-b-c three wave pattern. These are corrective, which implies the next major wave will be up. Second, at the low this month there appear huge momentum divergences, and that always implies smart money is buying cheap shares. So shall we join them?
Here is a close-up of the ‘c’ wave on the daily chart:
Source: interactive investor. Past performance is not a guide to future performance.
The shares have pushed up strongly this month from the £2.05 low to the current £3.60 for a decent 75% gain.
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There are two gap targets on the way down. Recall that targets act as magnets, drawing the share price towards them following a major reversal. That sets my first target at around the £8 area, with the higher target at around £12.
Only a move below the £2 low would send me back to the drawing board.
I am putting this share on my Buy Low/Sell High list.
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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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