GSK is a falling knife – can it be caught here?
How the mighty have fallen! GlaxoSmithKline (GSK) has been one of the major global pharma companies for some years, but with uncertainties caused by the possible changes to the US Obamacare regime and, of course, Brexit, sentiment has turned very sour on our major drug companies. And they have not helped themselves when AstraZeneca (AZN) has recently admitted to issuing a false drug claim.
But the search for more effective drugs is unlikely to dissipate soon and that places GSK as a possible ‘buy’ in a contrarian play.
Of course, you can jump in willy-nilly and cross your fingers that you have guessed correctly, and hope for the best in what I call the Crossed Fingers investment method, but is there a more scientific way to judge a high probability/low risk entry? I believe there is.
Although there is no method on earth that can be 100% accurate in every situation, by entering a well-planned stop loss for every trade, you can obey the time-honoured strategy of cutting off the losers and letting your winners run.
This is the weekly chart and shows the sharp decline off the 1,725p June high to the current 1,300p region – a decline of 25%. Note the decline was signalled by two major support breaks. First, the major blue trendline was broken in late July at the 1,575p level and second, by a break of the yellow chart support at 1,450p.
Both were major ‘sell’ signals. Anyone not holding this share for the very long pull would have been well advised to exit, especially at the higher signal.
Today, most of us need to be bargain hunters – not so much momentum chasers, so the question is this: have the shares fallen into the bargain basement?
For clues, I go to the daily chart:
This shows the decline in a clear A-B-C three wave pattern. Wave B is a simple a-b-c correction and currently, we are in wave C. Are there any clues that this wave has terminated, or is about to?
I believe there is one major clue that indeed we have reached the bottom – and that is the observation that the height of wave C is equal to that of wave A at around the 1,300p level. This equality is a fairly common Fibonacci relationship between these waves, and there is also a huge momentum divergence as the shares have slid lower in recent days into the 1,300p target.
Selling pressure is drying up!
My conclusion? The odds are high that the shares are turning here at around the 1,300p level. I would only be concerned if they dipped to the 1,200p area.
If correct, my first target is around the wave b of B low at the 1,450p area with higher potential to the wave B high at 1,550p at least.
I believe a buy here is a relatively high probability/low risk trade.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.