Chart of the week: When trading gods smile on you

A textbook example of how to use basic chart methods to pinpoint when a stock has bottomed out. 

Just Eat follows my roadmap precisely

Sometimes, the trading gods smile down on you and offer you an irresistible setup for an excellent reversal trade, where the timing is perfect and with very low risk of failure and where the potential profits are very high. And so it was with my Just Eat (LSE:JE.) COTW of 10 June.

• Chart of the week: A new FTSE 100 stock to trade

This is a textbook example of how to use basic chart methods to pinpoint such an opportunity to catch a major bottom in real time.  Remember, most analysts advise not to try to pick tops and bottoms but to 'trade with the trend'. Of course, they say that because they have not learned how to do it!  And it's a lot safer for the reputation than otherwise.

And if you are able to zoom in on tops and bottoms with decent accuracy, your profits are so much larger than jumping on a trend that may well be about to terminate anyway.  Who wants to be the last one holding the parcel?

So, this was the short-term chart I displayed last time. It showed the market was in a bear phase and so in a position for a possible bottom – provided I could read the signals correctly.

In fact, I noted the looming momentum divergence on the way down – a sure sign that selling pressure was on the wane and that eventually, the growing buying force would stop the rot and put in a low. So my job in June was to locate any tell-tale signs for a turn up – and I was not to be disappointed.

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

The latest waves down followed a textbook five-wave wedge (or ending diagonal).

This is what I wrote in June:

"And up pops a classic ending pattern in the shape of a five-wave wedge (or ending diagonal) accompanied by a huge momentum divergence.  Any push above upper wedge line at just above the 600p level would very likely send the shares scooting rapidly up to my first target around 650p."

So did I find the bottom at 585p on 6 June?  Here is the chart updated to last Friday:

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

Indeed.  After punching above the upper wedge line at 600p (my buy signal), the shares entered a lengthy consolidation between 600p and 650p which served to put us all to sleep waiting for something to happen.

And then something did happen – and it was an explosive rally to 830p on 29 July, opening up a gigantic gap which validated my forecast for a sharp reversal out of the momentum divergence and the small wedge.  It blew my first target at 650p out of the water.  In fact, the first trade after 630p was above 800p on that day.

So, my protective stop under 585p was safe and untouched.  A long entry at 600p risked 15p and produced a potential 200p profit for a reward/risk ratio of over 13 – a most satisfactory result.

• ii view: Bid target Just Eat keeps growing

And, since then, the shares have been consolidating those massive gains and seem to be forming another wedge.  That could be what some call a bull flag which would be confirmed by a push above the upper blue wedge line.  In that event, a target above the old high at 900p can be entertained.

Incidentally, please note that I have not referred to any data surrounding the company, nor its competitive position in the world of food delivery services to achieve this result.  This is deliberate, since detailed knowledge of such data can severely impact my decision-making as a swing trader.  

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.