Chart of the week: is bombed-out BT finally a massive buy?

After a number of years in decline, our chartist examines whether last week’s share price plunge might be a selling climax and the prelude to a solid rally phase.

Last week, long-suffering BT (LSE:BT.A) shareholders felt the indignity of the first dividend suspension since 1984, as well as the formation of a strong rival in the O2/Virgin Media merger. A double whammy indeed.

With no payout this year and an uncertain one next, the shares now become a pure capital gains play, rather than a reliable but boring dividend payer so beloved by pension funds.

Will many of the latter now give up and cash out, or will many take a long-term view and hang on? To be frank, there are few good dividend payers out there any more since a whole host of companies are cutting and/or eliminating dividends as the pandemic takes its toll. We are now in a new era of reduced income expectations. And, of course, that is firmly deflationary.

But ‘bad’ news is nothing new to this old warhorse of the LSE. In fact, the shares have been on a steady slide since the heady days of 1999, when at the height of the tech boom the shares reached the giddy heights above £10.

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There was a mini boom in the 2010s when the shares reached a Fibonacci 50% retrace of the old all-time high at £5. But, since 2015, they have been in a solid bear trend to reach Friday’s low at the £1 region.

So, with the ‘bad’ news out of the way and sentiment at rock bottom as dividend-seeking investors shun the shares, are we at a major low? After all, shares make major lows when bullish sentiment is weak, not otherwise. Let’s take a look.

This is the long-term monthly chart:

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

We are at the wave ‘b’ low at around £1 which is a decade-old low. Note the momentum divergence here – a sign that the selling pressure is gradually drying up on this scale.

If the shares can base around here, we will see the market begin a rally phase in a ‘c’ wave that should last many months, if not years.

Here is a close-up on the daily chart:

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

The important feature here is the textbook triangle/wedge in the fourth wave position. And on Friday, the market broke below this wedge in a final fifth wave thrust. When this wave terminates, it is highly likely we will see a swift reversal up, especially given the very strong momentum divergence.

So, I am expecting this thrust up to confirm last week as a selling climax and the prelude to a solid rally phase.

Provided this scenario pans out, my first major target is the £1.60 area. I believe downside risk is low at this £1 region.

I own BT shares.

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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.