Chart of the week: How Centrica could shock us all

At a 20-year low, and despite a long list of problems, Centrica shares could experience a near-perfect alignment of bullish factors later this year, believes chartist John Burford.

Will Centrica now step on the gas?

Could it get any worse for British Gas owner Centrica (LSE:CNA)?  The furore over the awarding to the CEO of a 44% pay rise to £2.4 million as the shares have now sunk to a 20-year low shows little sign of abating. Could this be the high-water mark in this era of rewards for failure?  

This year alone, Centrica's share price has dropped from 140p to the current 88p, a loss of 38%.  It seems a far cry from the 400p valuation six years ago.

But hold on!  The massive 12p dividend remains, despite pressure for cuts, so for many investors the CEO is being seen as a hero - so far.  Half-year results are due on 30 July which will be closely watched for signs of a dividend cut – and a likely change in direction for the company.  That could be a very interesting scenario.

Not only has British Gas lost many customers to alternative suppliers, but market sentiment remains firmly bearish as many pundits see no hope at all for the shares to recover.  Most say they wouldn’t touch it with a bargepole.

And that means only one thing – I am very interested in looking at the case for a contrarian stance (with great timing, of course)!  

So, let's get to the all-knowing charts.  Here is the very long-term monthly:

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

In the era before the energy markets were deregulated, Centrica was in a general bull market.  Even the 2008/2009 Credit Crunch impacted the shares much less than many other FTSE 100 companies.  And Centrica's share price high was set near the 400p mark in September 2013.  Since then, it has been a ski run slide down the mountain.

And to create a new 20-year low takes some skill just as the FTSE 100 is knocking on all-time highs – and the Dow Jones/S&P 500/Nasdaq have this week made record highs!

But note the five-wave pattern on Centrica's chart, with the current market in an extended fifth wave.  Elliott wave theory tells us that when the fifth wave of an impulse pattern such as this one terminates, a reversal begins.  The question is: are we at or near the end of that fifth wave and, hence, at the start of a reversal?

For clues, here is the weekly chart action off the high:

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

The red fifth wave also sports a five-wave pattern – and along very decent tramlines.  That places the current market right at or near the termination of fifth waves of two degrees of scale – and on a momentum divergence on this chart as well.

That makes further downside as limited, and if the market can base around here and then push up through the upper tramline at 120p, I will be looking at a target at the 250p region.  That should be the extent of my 'b' wave (see monthly chart) – and lead to a renewed slide.

And if the dividend is cut later this month to say 8p, even at the 120p target the yield will be a juicy 6.6% - not at all bad in today's low rate environment. That should boost demand for this very high value defensive share.  

Finally, global natural gas prices are depressed, which should help increase margins this winter – if the trading desk is awake to the opportunity.  We could be looking at a near-perfect alignment of bullish factors later this year, especially if the many shorts start to cover.

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.