“Not having had the opportunity (yet) to attend TCS, I was interested if you could comment on the chart (candlestick) for DEO (US ADR's) as it seems to be in a generally consistent upward pattern measured against both its rising 50 day and 200 day moving averages. What might one hear in TCS concerning this chart? As always, thank you for an excellent service.”
Eoin Treacy's view Thank you for your kind words and
I look forward to welcoming you to The Chart Seminar in future. Diageo is emblematic
of the global Autonomies sector with a truly global footprint, solid record
of dividend increases and an impressive suite of household name brands. Following
an impressive advance it has a P/E of 20 and yields 2.45%.
At The Chart Seminar you would have heard us discuss the aesthetics of a trending market. A trend's consistency characteristics give us some insight into how supply and demand are interacting. As we consider Diageo's ADR let us imagine we are describing the price action to a blind person. We do this as a training exercise to see if delegates are providing a clear picture of the consistency characteristics:
Blind Questioner: “Is it trending or ranging?
Factual Interpreter: “The share ranged for a number of years until 2003 when it broke out and trended higher until 2007. It gave up the entire advance during the credit crisis of 2008, found support near $40 from early 2009 and began to trend higher once more.
Blind Questioner: “Has the trend been consistent?”
Factual Interpreter: “Yes, prices have more than tripled from the low but have done so in an orderly fashion.
Blind Questioner: “Can you describe the consistency characteristics?”
“A progression of higher major reaction lows is evident from May 2010.
“A progression of higher rally highs is evident from 2009.
“Between 2009 and 2012 reactions of approximately $13 occurred once a year but the size of reactions has contracted as the trend has matured. Reactions of $7 have been evident over the last 18 months.
“Each of the ranging phases formed one above another to create a staircase pattern.
“Each range has been completed with a sustained breakout.
“Prices have found support in the region of the 200-day MA on successive occasions following pullbacks
“The length of time spent ranging following a reaction has compressed over the last 18 months.
Blind Questioner: “A consistent trend is a trend in motion so how can we expect prices to unfold?
Factual Interpreter: “Reactions have become smaller and last for a shorter amount of time suggesting that the imbalance between supply and demand is becoming progressively wider. Provided this remains the case we can anticipate that the sequence of one range forming above another will persist.
Blind Questioner: “What would inconsistencies look like? Can we script what an ending would look like?”
Factual Interpreter: “If the pattern of progressively smaller and shorter consolidations persists, the potential for an upward acceleration in prices will increase. This would be a Type-1 trend ending because it would suggest that the dominance of demand over supply had been amplified to an unsustainable level.
“Alternatively, a failed upside break would potentially signal that the demand dominated environment is deteriorating.
“A break in the progression of higher reaction lows, currently near $120, would signal that a peak of at least short to medium-term significance had been reached.
“A reaction of more than $8 would suggest the supply/demand imbalance is contracting.
“Any of these last three factors could suggest that a lengthier process of consolidation is unfolding. However, a sustained move below the 200-day MA would constitute a major inconsistency because it would break the progression of higher major reaction lows, would be the largest reaction in 4 years and would have a material impact on investor psychology.”