Chart of the week: A new bear trend for Prudential shares?

After successfully calling both up and downtrends on this blue-chip, here’s this analyst’s next call.

Prudential follows my roadmap

This week, I want to illustrate in my long Prudential (LSE:PRU) campaign how swing trading can often produce far greater returns than the usual Buy-and-Hold strategy. It is a strategy underused by many small traders/investors. Trading both the ups and downs requires some skill, but especially vigilance.

There are many myths floating around the investment world. One of the most glaring is the idea – promoted by most pundits – is that it is impossible to pick tops and bottoms in markets to take advantage of major trend changes. They maintain that the only way for most small investors to invest in shares is to pick great companies and hold the shares for ever. 

As any experienced investor has discovered to their cost, some shares do not do the decent thing by advancing for ever into the sunset. They trace out distinct waves up and down – and it is the down waves that can seriously affect your financial health.       

I believe I have shown it is possible to pick tops and bottoms with high accuracy, in many cases, from the extensive collection of my COTWs.  So how am I doing with my Prudential campaign which I started covering in 2016?

In my COTW of 7 August 2017 I had maintained a bullish stance from 2016 and this is what I wrote then: “Last July, I was bullish when the shares were trading at the £12 level and when I covered it again on 20 March, the market had risen to the £18 level, which was a major target of mine.”

By March 2018 it had hit my major target at £18. This is what I wrote on 7 August 2017: If my labels are correct, we are at or near the end of wave 3 and the next big move will be a decline in wave 4.

So, back in March 2018, I forecast a decline. On that basis, shares would have been sold and short positions could have been taken. Here is the chart updated to today:

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

A swing trade from £12 to £18 produced a gain of 50%. Not to mention the gain from any swing short positions taken near the highs to today’s £14 print.   

Monday Flash: The FTSE is down hard this morning and Prudential is now trading below £14.

Compare this with the Buy and Hold gain of only 16% to date over 3½ years – a paltry return. Of course, many hold the shares mainly for the dividend yield (currently 3.5%) and are less concerned with the gyrations in the price (assuming the dividend remains safe, of course).

Now the shares have declined to the £14 area, what is my outlook?

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

Since last summer, the shares have basically gone nowhere as they hovered around my blue trendline of support/resistance. But with the recent three up (a-b-c) that is typical of corrections, odds swing to a bearish outcome in a third wave down. Only a strong push above £15 would alter this scenario.

Remember, third waves are the longest and strongest in the book, and my first target is the £12.75 area with lower potential to next target at around £11. Recall the 2009 low was £2, and a normal 50% correction from the near-£20 high in January 2018 would set up the same target at £11. That would be a realistic target when the general market enters a severe bear trend.

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.