Chart of the week: is Shell’s share price rally on borrowed time?

After a spectacular and rapid recovery, our chartist discusses whether the next move will be up or down.

Shell has rallied a stunning 66% but is there more to go?

I last covered this share on 23 March on the very same day that the FTSE 100 index made its crash low at 4,898.

The latter has since recovered as high as 5,894 – a gain of a cool 1,000 pts (20%).  And Royal Dutch Shell (LSE:RDSB) has moved off its £9 low made on that date to the recent high of £15 for a stunning advance of £6 (66%) in only four weeks.

And these rallies have occurred on a major sentiment boost from the deep despair last month that produced selling climaxes. In Shell’s case, the US crude oil price had collapsed from $65 at the start of the year to the March low at $23 – a savage cut of 66%. 

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No wonder we have seen relief rallies this month – but have they exhausted themselves and laid the groundwork for a fresh plunge to new lows?

This is what I wrote on that important 23 March low point: “It has just made a new 20-year low under £10.  The wave labels are pretty clear – we are in a very extended third wave down.  

When it terminates, I expect a bounce in wave 4 and then move to new lows in wave 5 with crude oil moving possibly to the $12 range.”

And from that exact date, the bounce in wave 4 got started, and this is my updated chart showing the wave 4 in progress:

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

The first rally phase (in my ‘a’ wave) took Shell shares into the gap created on the way down.

An interesting feature of gaps is that they are usually closed eventually when in a move of the opposite direction. And when they are closed, they often move away in the opposite direction.  

Gaps act somewhat like magnets to draw the market to them – and then repels it. And this action certainly fills the bill in that respect. So, the rally phase could have been over at that point. The market did certainly retreat in my ‘b’ wave where it currently resides.

But the whole pattern would look best if we saw one more rally in wave ‘c’ to really close the gap and test the Fibonacci 50% retrace of the decline from the 2020 high to March low at the £16 area. But I am perfectly at ease if the decline resumes this week.

That means the rally is on borrowed time.

Of course, much will depend on whether crude oil prices can get up off the floor or if it will sink to new lows right away. Here is my dilemma:

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

We are in the wave 4 up that may have topped, or will do so with one more push up to the gap edge around the $36 area (currently $25). The jury is out on that.

But I would take any additional advance towards my £16 target for Shell shares as an opportunity to take quick profits if I had bought near the £9 low last month, or to lighten up longer-term holdings.

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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.