I have recently been looking for good quality companies that have been in a continuous bear market and where there are indicators that the selling is now looking on the verge of being exhausted. When you find such opportunities, if you get it right, this can be a huge trade opportunity. Have I found such an opportunity?
Vodafone is an equity where I consider there to be a few factors in play that would suggest that there might be a good breakout trade setting itself up. Let us take a look at the chart on the daily time frame.
Around 70.7 pence has been the ceiling for this share price since before the beginning of 2024. The bears overpower the bulls every time the bulls try to break this price level. There is clear resistance, as you can see from the chart. If you look to the left of the chart this strong resistance was very strong support from June 2023. If the price can break 70.7 pence, there is every chance that this will be the start of a breakout, even if just a short term bounce. The next resistance would be around 79 pence, 10%+ from the breakout area.
There are other positive signals coming together also, in particular, volume. If we see current volumes over the last few months, this have definitely been increasing compared to the volumes that were being traded during the second half of 2023. Is this relatively tight price action between 65-70 pence a sign that smart money are filling their bags and controlling the price action while they accumulate? We can't know for sure but we can closely keep following the price action going forward.
As it stands, this tight trading range is positive from a traders perspective because when it does break (whatever direction) we can expect a strong move. If there is a break below 65 pence with volume we should look to short, but if my bias is correct and it breaks 70.7 pence then I will consider a long position, particulalry if there is volume behind the move.
I am not a huge fan of indicators on their own but let us take a look at a couple of popular indicators on the same daily chart.
The red line running through the chart is the 200 period moving average. Since the end of February, price has been attempting to break this average and flip bullish, which is what being above the 200 moving average effectively means. It has now closed above this average and we are looking for a continuation. The moving average is now also flattening into a narrow state. I don't prefer to take long trades when the longer term moving averages are still in a steep decline as it tends to mean that the selling is far from over.
As a word of caution, moving averages are lagging indicators so you have to remember that even if bullish momentum is clearly in play the moving average will take time to clearly reflect that. The most important consideration for entering trades is looking to see what price is doing. Indicators shouldn't be used as a sole basis to enter a trade given most indicators are lagging in nature.
The other indicator, as you see below the price action is the MACD, a trend following momentum indicator. There has recently been a crossover and the green is signalling bullish momentum. Whether this will be maintained is anyones guess but these are positive signals that support the set up that I am looking at.
I am going to place a trade order at 71 pence with a stop loss at 68 pence which is around the 200 moving average. I hope you find the analysis interesting.
If my trade order gets executed, we will revisit this post and you will see it in either my analysis of winning or losing trades at a future date.
Trade Clearly!
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