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Charting a recovery in a share

A recovery in the price of a share can bring about mixed emotions. Those who bought the share at a higher price and held it while the share price fell will feel slightly better as the price rises again. The ‘greed and fear’ element of investing (or more likely, trading) will be important. Greed will fuel the hope that the recovery will persist and the level at which you purchased the share will be surpassed. Fear will fan the flames of doubt and make you wonder if this is simply a limited correction in the share price, to be followed by a renewed decline.

The lucky ones who purchased the share at a low price also have greed and fear to play with of course, and will act accordingly based on the sentiments expressed above. The potential investors who ‘missed’ the opportunity to buy the share at a low price have different greed and fear thoughts of course. Greed argues for chasing the share price higher, fear cautions against it. Could the share price drop a bit and give you a better entry point? Or if it drops a bit, does this mean it could drop to the recent lows or even lower? Yikes!

Long-term investors of course don’t have this problem. Buy and hold, collect the dividends and retire rich. Or in the case of Mr Burns (Simpsons), turn the ticker tape machine back on and wonder at what happened to all the blue chip shares that you purchased a long time ago and seem to have been wiped out?

The monthly chart below (semi-log) shows the situation currently facing holders (or potential holders) of Rolls-Royce. I own this share, so will of course be biased about upside potential. From a chart perspective what would make me feel better? The push above the horizontal blue line is nice to see, but holding this will be important. Other good things to see would be a push above the 5-year moving average (blue line) and the horizontal red line which marks some minor highs and lows near 180p/200p. A swoon from current levels would be disappointing, and falling below the 12-month moving average (red line) would not be a good technical signal.

The chart below shows the weekly chart which gives a closer look at current activity. The red lines mark some Fibonacci retracement ratio levels from the 2014 high to the 2020 low, with the 38.2% retracement in focus now near 173p. Interestingly enough, the 61.8% retracement is near 259p, and a simple extension measure from a very messy basing pattern points towards 270p or so. Which, for those who don’t buy shares on a ‘hold them forever’ basis (and given the suspension of dividends from RR since the pandemic, a ‘take profit’ level may be warranted) may be a target to aim for.

What I like about current activity is that the red circle area from early 2020 is being ‘filled’. Gap theory in technical analysis and actual trading behaviour can be fascinating. In this case, filling this weekly gap (a weekly close above 165p would do this) could give some insight into bull sentiment, and the reverse if this doesn’t happen of course.

The blue circle (September/October 2022, Truss tantrum if you will…) shows a ‘miss’ when the share could have continued to drop to test the 2020 low (or break below it) but didn’t. These are very difficult to trade in real-time, but my old proprietary trading desk boss at Bank of America (trading intraday to short-term FX!) used to hammer into us (not quite literally…) the importance of ‘misses’ into our trading strategies. The implication to sentiment is clear, while headlines and risks were negative, the share was actually finding buyers.

Bottom line? The share has climbed a lot on news headlines over the last few months and a decision point could be at hand for those who have held the share during the drop, those who bought the share at lower levels, and those who don’t hold it but are watching and waiting. Interesting times!

Keywords: technical analysis, equity market analysis


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