Shares digital

The three largest stocks on the London Stock market account for some 20% of the total value of the FTSE 100 index, itself based on the top 100 UK companies. Because the FTSE 100 is a capitalisation weighted index, the price movements of the larger companies have a far greater influence on the movements of the index than do the smaller ones. In comparison with the the biggest three, Rentokil Initial and Taylor Wimpey are currently the two smallest FTSE 100 constituent companies by market capitalisation and as such they each make up only 0.1% of the index. To get a idea of the likely movement in the index, it pays to take heed of the charts of the ‘super cap’ stocks as their direction will be influential.

BP (BP.)

Despite the oil price and record profits accruing to oil companies, the chart is cautioning the bulls at present. A very long-term bull trend line whose origin is way back in April 1994, subsequently drawn off the low in February 2003 and which has been clearly supportive twice in 2007, has been tested but not conclusively broken in late January. This down move can clearly be seen to have resulted from the minor double top pattern that formed between October and January, the neckline of which ‘A’ broke and targeted 507p on the break of 578p. The subsequent close low was actually at 504p six trading days later, as major historic congestive support close to that level came into play. Although we have now seen a small bounce, look closely and you see the shares have tested resistance from the 50 and 200-day averages which are now crossing negatively and threatening a ‘dead cross’ formation if the 200-day starts now to decline. Momentum isn’t helping either as it continues a down trend that begun with bearish divergence. The bigger picture risks a larger double top with neckline ‘B’ or perhaps it will prove to be head and shoulders formation. Either way a move below 500p would prompt potential weakness to 365p, very close to the 2003 lows.

SELL at 548p • Stop Loss 580p • Target 450p

HSBC (HSBA)

Long-term bull trend lines are not unique to BP. The chart of Britain’s biggest bank HSBC has one too , the origin of which was back in January 1995, the tail of which is evident on the left hand side of the chart and which after a significant period of support, the shares broke below at point ‘T’ on the chart in the autumn of 2006. Subsequent price movement has been of a weak nature and with recent bank sector woes, the shares have dropped to a level some 34% below the November 2006 highs. In doing so they have moved through two important congestive support levels at 868p and 785p. The spike low in January was accompanied by high volume and the initial recovery was equally rapid. This is characteristic of capitulation and may well mark the low point of the shares. Momentum has recently breached its own bear trend line which again is positive and if the share price can follow and break above the bear trend line it is currently pressuring at 770p then a successful test of 785p would prompt the expectation of a move to 868p and then 957p. Risk is further weakness appears targeting 640p.

BUY at 753p • Stop Loss 709p • Target 957p

Vodafone (VOD)

The super long term bull trend line on the telecoms company’s chart can be seen to have been highly influential as it supported in 2006. This line has formed the base line of a channel that has been broadly defining the major peaks and troughs for the last five years. The last attempt to test the upper return line in last 2007 never actually made a proper encounter though it did achieve a blow off move within the context of the shorter term bull channel that defined 2007’s price moves. The resulting weakness has seen the shares drop to test the base line of this latter channel and the larger channel’s mid-line, in the process breaking once more below the 200-day average as momentum itself continues to trend lower. Last week also saw a gapped down move on the daily bar, not a good sign. Bulls would need to see this closed by a move back up to 170p and cannot get excited ahead of a move above 175p. For now we favour further weakness toward the rising channel base line that is likely to coincide with congestive support close to 135p.

SELL at 162p • Stop Loss 171p • Target 135p