Chart of the week: This blue-chip is a strong buy

Is RSA Insurance offering us a Yuletide present?

In common with most of the insurance sector, RSA (RSA) shares have been in a major uptrend for some time. But with the damaging hurricane season boosting claims especially in the Caribbean, the shares have taken a hit. But that has provided us with a classic recovery set-up.

As you know, I love to see a chart where there is a major trend in force and a current pull-back in the form of an A-B-C three wave pattern. This signals a corrective phase and then we can expect the main trend to resume with a high degree of confidence – and at low risk. I have offered multiple examples of this scenario this year.

And when the final C wave sits on a strong Fibonacci level with a momentum divergence, that is usually all I need to take a position and all I need is is a close stop loss. The probability of success is high (but not 100%, of course).

Here is the daily chart

The high was made at the start of hurricane season in early September and there was a sharp fall in wave A. The decline was turned at a precise Fibonacci 62% support level. Isn’t that pretty? If you had asked 100 people in early September as the price was falling what price the shares would fall to before a meaningful advance could be staged, not five people would have a logical reason to suggest the 610p level.

Those that understand how Fibonacci rules the waves – and knows that the 62% level is the most common turning level – would be those five. The other 95 would offer total guesses.

Do you think such observations and forecasts could be useful to investors? I truly wonder why so few pros (and retail investors) bother to study very simple chart methods such as these that are proven to work time after time.

In recent days, the shares have declined in a totally predictable way in the third wave down to the next Fibonacci level, at 78%. Note the large momentum divergence here – a clear signal that the next move up will be sharp.

The other major chart feature is the blue trendline joining the major highs (at least four). The shares are poised to break clear of that line – and confirm the resumption of the uptrend.

For me, they are a strong buy.

I wish you all a Merry Christmas and a Most Prosperous New Year!

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.