Wind at the back

Once in a while you stubble across an asymmetric opportunity that at first glance seems insignificant when merely glancing over the Risk:Reward numbers. As a technical analyst, trend follower price is all I dance with. Trusting the nature of probabilities that past behaviors of price turn to repeat.

Classic Cup and handle pattern on Barloworld. The base formed on declining volume meaning the selling that brought the stock to the R41.88 low had been slowing down. As we do when changing direction coming to a full stop. The lower low of September 2020 was not followed by a lower low on the stochastic oscillator. A bullish Divergence is a classing reversal chart pattern. What has happened since? The stock proceeded to make higher lows and higher highs. Breaking the down trendline. All this while holding a 50 month EMA. With a long term stop loss below the R41.88 say at R41.80 and a potential target at R188.60 a 1.7 risk:reward ratio. Seems pretty small until you find out that. That results in a 56% price gain. Time will tell

So What has been happening in the past year or so in the price since what will be a yearly low 1 September 2020? Let’s look at the weekly chart. The stock broke out of the neckline of a cup and handle chart pattern. Came back to retest old resistance and held it as support. After coming back from holding the 200 week EMA. Closing the past week with a nice bullish engulfing candle. At this stage updating the long term stop loss to R81.60. Changing the risk:reward ratio to about 6.

So what’s been happening lately? Well let’s look at the daily chart to find out. The stock has been making higher highs and higher lows. Current 52 week high close at R124.30 but the stock since retranced about two thirds of that gain. Held the 50 day EMA as support quite well. Forming yet another cup and handle pattern, whose target is R124.30 (Entry for the “wind at the back trade”). With a stop loss just below the handle R103.50 not a bad 2:1 risk-reward ratio for a short term target. If the stock can break and close above R110.50.

Remember the wind at the back? That 1.6 risk/reward we initially looked at. Start to look more like 1:10 risk:reward ratio. With a 7% price risk for a potential 70% price gian if you can sit tight and control risk.

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