Chart of the week: Is Barclays still in a bear trend?

Is Barclays still in a bear trend?

One of the many hazards of trading is the phenomenon of getting into a trade too early and then see the market move against you. There are many ways to handle this situation, from the extreme tactic of not entering a protective stop at all (and praying the market will eventually turn your way), to setting too tight a stop and being stopped out on the first setback.

If you decide not to use a stop, it effectively means you are 100% confident in your pick of the entry price and the direction of the coming trend. But because we all know market movements are never 100% predictable, that is a very arrogant attitude: it says I know better than the market.

Of course, arrogance and trading success rarely go hand in hand because such an attitude is dogmatic, and that trader tends to refuse to accept market reality when it goes against their prescribed path. That is why many traders/investors buy high and sell low (when they finally see the error of their ways).

Chart of the week: How to trade Barclays ahead of results day

In my 19 February COTW, I pinpointed a promising short trade in Barclays that ticked many boxes. Here is the chart I showed then:

Source: Chart of the week      Past performance is not a guide to future performance

I had a clear five waves down and a three-up in what appeared to be a textbook set-up for a short trade to ride the main downtrend. I identified an ideal place to enter shorts in the yellow zone at the 203p area. My protective stop was just above the pink trendline around 208p.

Bear in mind, I always enter my stop at the same time as I enter the trade, just to ensure I never run an unprotected position. Of course, the market could easily tick off my stop on a temporary surge and then back off, but that is a price I am willing to pay for a 'safety first' stance. I can always re-asses later (which I did here).

The other point is that I never allot a large part of my trading capital to any one trade. I can sometimes carry up to 10 open positions at a time, so my maximum position size on a single trade is restricted to at most 5-10% of capital, and often less. I have a portfolio approach to even out the returns.

So how did that one pan out? Here is the updated chart:

Source: Chart of the week      Past performance is not a guide to future performance

After my short entry, the market gapped up and made a high at 216p last Wednesday - and that little excursion took me out of my trade at my stop. But I kept monitoring because I had not abandoned my bearish stance on bank shares.

Only now I had new wave labels to work with - and they are a better fit than my first attempt. The a-wave has a nice five sub-waves and the c-wave has a large gap indicating strong buying. But it could not push much above the pink Fibonacci 50% resistance zone - and that gave me a clue the high of wave c was likely in place and I should enter a short trade looking for a sharp move down.

And if my large wave labels are correct, we are now starting a major wave 3 down to take the market to well below the low of wave 1 at 180p. In fact, I fully expect the 2009 Credit Crunch low of 47p to be at least tested in due course. But my first major target is the 186p b-wave low.