Shares digital

A break above the bearline suggests things maybe looking up

by Simon Griffin

SIGnet Index (SIGT)

SIGnet derives from the FTSE 100 but is not subject to its capitalisation weighting effects. The index has been a good guide to the UK market’s direction.

The decline since last November, presaged by bearish momentum divergence from early 2007, initially sought support from the bull channel baseline. But in the new year the fall tested the channel width extension target and the level of the old highs seen in spring 2006. A bounce to test resistance from the bear trendline off last October's high ensued, leading to thoughts of an expanding triangle formation. Retesting the 1,400 low area followed in mid-March but did not make a new close low, which was seen as relief for bulls.

Now the index has broken above the bear line (possibly the top of my triangle) and momentum is pressuring the trendline on its chart, unbroken since selling started. If the triangle pattern scenario plays out, the expectation would be for the market to build on the recent recovery. A safer play might be to await a move above the neckline of the potential double bottom, also a possibility. This would point to an 8.5% move up and a close rendezvous with resistance at 1,625 (see horizontal line R1), so influential during much of 2007. Resistance near last week's 1,520 close (chart line R2) could yet generate a slip back below 1,470 and weakness to a retest of 1400, some 8% below current levels. A move still lower would be seriously bearish.

This Week’s Hot Chart

BAE Systems (BA.)

From a charting perspective it’s crunch time for BAE. Clearly the share price has been dominated by a bull channel since mid-2006 and in that time has returned growth of over 50%. However, since last October, no doubt partially influenced by the general market weakness, the tone has changed to a sideways ranging stance.

This type of behaviour gives two opportunities. Firstly we can clearly see that, on a close basis, there is resistance around 508p while support close to 455p looks pretty solid, so that gives an opportunity to range-trade.

Secondly we know that a break out of this channel will give a target move of some 50p. Recent weakness has seen the shares dip to test support not only from this range base but also from the bull channel baseline.

The implication is that a bounce must happen now or the shares are set to drop toward 400p and retest the lows of 2007. So the strategy for technical traders should be to buy in at current levels while placing a tight stop to protect against any downside breakout.

Technical talking point - Crowd psychology rules

In technical analysis there is an agreement that crowd psychology ultimately generates chart patterns. So a way of measuring the thinking of the 'crowd' would be a good place to start to try to discern the future direction of a market or share. The adages that seem to keep ringing true point to the market's ability to flummox the casual observer, rising when the portents seem bleak and peaking just as there seems no end to good news. Yet the swing in the crowd makes the market trend and individual traders fight it at their peril.

To quantify the broad mind set of the 'crowd', Edwin Coppock developed his indicator first published in Barron's newspaper in 1962. Having been asked by the Episcopal Church in America to develop a measure that would help them time buying opportunities in markets, he reasoned that the human mind took time to rationalise trauma. Priests he spoke to generally thought the healing process took from 11 to 14 months. He used these time periods for his smoothed compound rate of change indicator originally to be applied to the S&P 500, that still bears his name.

Its interpretation is simple and its use is to signal when to buy into a market or share. The signal being given when the indicator begins to rise while still below the zero line. In its classical interpretation it does not give sell signals, though it has been suggested that peaks above zero could be used to caution possible tops or more likely corrections in the trend while divergence more strongly signals potential tops. Combining the latter with buy signals seems to have worked well for the FTSE 100 over the past fourteen years. The Coppock indicator has just made the first condition for a buy signal to potentially develop on the FTSE 100 index by declining below the indicator zero level. We must now watch for it to turn upward.