Exercising prudence in Prudential

The market in Prudential shares has come up against resistance. Is it time to take profits? John C Burford explores the charts.

In my postof 8 April, I showed what could be done with a chart of an individual share in this case Prudential(LSE: PRU). Remember, I will only analyse large cap issues because they are subject to far fewer nasty shocks than are small caps.

Large cap shares often display beautiful Elliott wave patterns, excellent tramlines and even accurate Fibonacci targets.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

When I find one of these, I will put it on my watch list, and even trade it when I can find a high prob/low risk entry.

But UK shares do not trade 24 hours, as do my usual markets, and so opening gaps can give you a major headache, especially when the market opens way past your protective stop!

Advertisement
Advertisement - Article continues below

In the case of Prudential, I had these Elliott wave labels on the multi-year chart:

16-4-8-MWT-1

The market was in a clear fourth wave down off the 2015 high and the form wasan A-B-C, which is always a corrective pattern that told me that the major trend was still up.

And this was the daily chart of the wave 4 pattern I showed:

16-4-8-MWT-3

This is what I wrote then: "The rally to mid-March is either wave 1 of a five up or wave A of an A-B-C. And the dip to wave 2 or B carried to the Fibonacci 38% level! That makes three separate 38% retraces. I did say that level was an important one.

"The path of least resistance seems to be up and directly ahead there is a large gap. Remember, gaps do tend to be filled (eventually) and this one is my immediate target.

"The other point about gaps is that once filled, the market usually recoils back the way it came and that is what I expect here. That will be a supreme test of my wave 5 up idea.

Advertisement
Advertisement - Article continues below

"But now, a long position taken near the wave C of 4 low can be protected by moving the protective stop to the entry point. That is a good place because if the market does decline to it, it would immediately cancel out my wave 5 idea and the market would likely decline below the previous wave 4 low."

So my immediate outlook was for a continuation of the rally off the February low.

Here is the daily chart updated:

16-4-15-MWT-3

As I suggested, the immediate gap has now been closed (red arrow) and the market is knocking on the door of the earlier gap (purple arrow).

With that, the market has moved up from the C wave low by 22% - and handed a perceptive trader a fat running gain.

But now, I must give some thought to managing the trade. Here is a close-up:

16-4-15-MWT-4

Using an Elliott Wave rule, when an A-B-C correction has played out, the main trend resumes and the next move will be a small scale five up in the direction of that trend. That implies I expect the pattern shown is the start of that five up.

Advertisement
Advertisement - Article continues below

But as in life, there are always alternative paths. If the decline off the 2015 high has not completed and my C wave label at the February low is incorrect, the rally off it could be an A-B-C instead, leading to a resumption of the downtrend. That is why I placed these alternative labels on the current rally.

In any case, with this week's rally above the March high, I have the condition to consider the rally alive. But how far could it carry?

The Fibonacci 50% retrace of the C wave lies directly ahead. I have also drawn in a potential tramline off the 2014 high, which should also represent resistance.

With these two resistance levels, further upside progress might be difficult. Also, I have a momentum divergence building. Hmm.

They say that you never go poor taking a profit, so is this a good place to do just that?

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/investments/investment-strategy/600772/just-five-assets-matter-for-investors-portfolio-asset-allocation
Investment strategy

Just five assets matter for investors. Here's what they are

Every investor’s needs are different – but most can be met by the right combination of five investments
11 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020