There's something about the stock market which has always puzzled me and it's something I've never gotten a straight, sensible answer to. Why do gaps occur in logical price movements?
Here’s a very simple example of what I mean. A number sequence will run 1-2-3-4-5. Yet on the stock market price movement would most likely run 1-2-3-5 and simply skip over the 4. They drive me nuts, because my software wants things to run logically.
But here's the puzzle and it involves the word collusion.How is it a share can suddenly open at a particular price, having gapped over a specific level, without the brokers colluding on what they intend to sell a share for?
When the smelly stuff hits the fan for Libor movements, forex movements, invariably the word collusion appears. Perhaps it's different with shares and perhaps all brokers simply make exactly the same decision at the same time, without colluding.
While Centrica (LON:CNA) is today’s subject, I recently wrote about Lloyds (LON:LLOY). I offered a worst case scenario where Lloyds share price was gapped above its long-term downtrend at the open, given a couple of days in the sun. It was then gapped below the long-term downtrend and the price was trashed. Rather horrifyingly, this has proven exactly what happened and Lloyds is now back on the naughty step with a possibility of somewhere between 65p and 68p presenting itself as a viable entry level.
That's enough about Lloyds and gaps. Now, let’s look at Centrica's chart for the last few years. I've circled a few areas where the share price suffered a choreographed drop at the open.
Importantly, none of these circled areas have seen the share recover to paper over the movement gap.
I shall look on the bright side first. If Centrica now were to trade above 243p, I'd be pretty comfortable it intends some near term growth to an initial 267p. I'm able to calculate a secondary at 277p, maybe even a longer term 310p.
But am inclined to take this with a pinch of salt until the share actually closes above its blue downtrend. And if the market opts to gap the price above blue, given recent patterns I'd strongly suggest waiting a few days to ensure the movement sticks.
But for now it's not looking great.
In the event of movement below 219p I'd have some real concerns as this permits a near-term reversal to an initial 209p. As can be seen, this then risks allowing the price to close below the red line, the current long term uptrend. As a result, it's not difficult to imagine the weakness continuing to 192p. And should the company choose to maximise on a period of weakness by releasing duff news, the ultimate bottom on this trading cycle becomes 154p
Usually I tend to feel winter allows energy shares to experience a short term boost. In the case of Centrica, it won’t need much to perk up above 243p and hopefully have a stab at the blue downtrend. Alas, when I look back at the winter surges of 2013 and 2014, the market didn't exactly permit the share to soar to the clouds.
Alistair
www.trendsandtargets.com