Chart of the week: A blue-chip poised for major rally

This trade is in the money, but could deliver significantly more, according to this analyst.

BAT appears poised for major rally

I have been covering the progress of these shares since earlier this year in several COTWs in what I hope is a clear illustration in real time of how I use my Tramline methods to fish out potentially rewarding market moves – and how I handle the position as time passes.  

My focus is generally on swing trades where I hope to capture a typical market move lasting anywhere from a week to a few months. But I believe this British American Tobacco (LSE:BATS) position will be more of a longer-term hold.

• A simple trade with high probability
• This winning trade could deliver again
• Bullish on this FTSE 100 high yielder

My emphasis is on precision timing of entries (and exits) where the risk of loss is judged to be low compared with the potential gain. This sets me aside from most analysts who claim it is impossible to pick tops and bottoms.  You can be the judge of that.

Obviously, if you do have such a reliable timing (and correct direction) method, your profits are likely to be far larger than otherwise – and crucially your risks are lower as a bonus.

Here is the chart I posted in my COTW of September 30:

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

My original buy was just after the wave 5 low in the £26 area in my COTW of 28 January.  That was prompted by a potentially complete five down to my lower tramline on a strong momentum divergence (red bar).

And following the first surge to the £32 area in April, the market entered a consolidation phase where the shares still remain inside – but are now showing initial signs of emerging from.

I mentioned last time that the nascent vaping sector is under pressure from the growing health concerns, and no less than Mr Trump has openly criticised the industry. That put some pressure on the shares last month but, crucially, no new lows were made, and BAT seems to have weathered that storm in a bullish show of strength.

Here is the above chart updated:

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

I have slightly amended the position of my blue tramlines to better fit the highs/lows since 2017, and now I have not a pink wedge, as I suspected, but a small tramline pair with the parallel yellow line acting as the lower tramline. And I have amended my wave labels to accommodate recent price action. Remember, your wave labels are always subject to amends in real time.

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Very conveniently, the final hit on that support on 22 October also planted a kiss on the upper blue tramline and is now engaged in a Scalded Cat Bounce up.

Recall that a Scalded Cat Bounce is a normal response to a tramline kiss. It is a sharp rejection of that price level. Sometimes, it requires two 'poisoned' kisses for the final rejection, as here.

So now, the shares are moving up towards the upper pink tramline, and a thrust above it would confirm my established outlook for a first target at £40 and then £40–£42. 

In the accompanying video (available from tomorrow on interactive investor's YouTube page), I lay out my longer-term forecast.

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.