Chart of the week: Is this bank about to be hit for six?

This high-profile lender has done exactly what technical analyst John Burford predicted. Here's how, with an indication of what could happen next.

Standard Chartered follows my roadmap (after a glitch)

I was surprised to learn that the last time I covered this share was back in December 2017 where I was very negative on it.  Regular readers will know that I have been a perma-bear on UK banks for a very long time. 

Since December, the shares have been in a large consolidation zone, but is now breaking clear and following the precise scenario I painted then.

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To recap, this was the weekly chart I posted on 4 December:

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

I noted that the rally off the 2016 low was in the form of an A-B-C (which is always corrective to the main trend) and the C wave was set on a large momentum divergence (red bar) that told me the buying power was drying up and to prepare for a resumption of the main downtrend.

That duly arrived and, as of 4 December, I had short trades working: and this is what I wrote: 

"To sum up: we have had at least three excellent low risk shorting opportunities since August 31 – at the 860, 780 and 750 levels.  All are in profit to date."

And, disappointingly, right after that, the market pushed back up one more time towards the 860p resistance level. So that presented me with a few headaches.

Different traders would react in different ways to such a reversal of fortune.

Some would just sit on their shots and wait for the market to (hopefully) turn back down (which it did in February).  That is perhaps fine when investing with cash, but not so when spread betting with the enhanced leverage employed.

One technique I use in spread betting is to set covering buy stops if certain levels are breached on the upside.  The worst-case scenario is to escape with net zero loss – a most satisfactory outcome in the circumstances.  But, if nimble enough, you can at least take some profits on the campaign.  

It became pretty obvious the market was not going to resume its bear trend at the time, so evading action is usually the prudent course.

But, after the 860p re-test, the market resumed its decline once more and there were several opportunities to reinstate short trades again, principally at the 780p area.

And this is the current picture:

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

I now have amended my tramline placement to make a better fit on the highs and lows and in April, after a sharp decline, the market met the lower tramline in the 700p area and then staged a bounce to the Fibonacci 50% retrace at 780p where a low-risk short trade was entered.

The market then retreated back to the lower tramline support, and last month engaged in a severe and lengthy test of the strength of the support there.  But last week that support finally gave way and the market made a clear break down.

This is what I concluded in December: 

"My best guess is that the shares will continue lower after perhaps a small bounce and a break of the lower blue tramline in the 700 area would really knock STAN for six."

After an intervening rally phase, the market traded down to 640p last week, making that forecast eight months ago entirely correct.

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.