David Paul: Redrow (RDW.L)

Redrow (RDW.L)

The builder Redrow features prominently on the Stock Viewer on VectorVest. The Stock Viewer sorts and ranks all of the shares on the London market by the highest combination of Value, Safety and Trend (VST). The chart of the share over the last year is shown below.

davidDavid Paul uses VectorVest Charting Software

RDW.L is undervalued by the market with a closing price on Friday 17th of December of 456p while the VectorVest valuation is 746p. As a default I like to invest/trade in undervalued shares and RDW passes this test easily.

Both Earnings potential and Earnings safety (RV and RS) are both ranked as excellent with values on a scale between 0 and 2 of 1.55 and 1.42 respectively. That’s another tick on my checklist.

On my default chart layout which shows the price, value and Earnings per Share growth (EPS) I observe that EPS is growing strongly and over the last year the plot runs from the bottom left of the chart to the top right with little volatility. That’s another tick on my checklist.

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The technical position of RDW looks very sound. The share is in the throes of a long term bull trend which is measured on VectorVest by the Comfort Index. This tool looks at the trend and the volatility of the trend over the last 3 years. At a level of 1.5, again on a scale between 0 and 2, this long term trend is ranked as very strong.

Over the last few months RDW has traded within a pennant formation. If you carefully draw a trendline from the annual high in September 2015 to the high at the start of November 2015 this consolidation is relatively easy to see. It looks likely that this trendline has been broken to the upside at the start of December 2015. During December the share has pulled back and “kissed” the trendline and over the last few days found support at the trendline. In a down day on Friday RDW held its ground and was up a handful of points on the day.

Many will wish to wait until the 1 year high at 5 pounds is broken before considering an entry but with a positive general market I favour preceding the breakout with a small position and then adding as the 1 year high is broken.

There are a lot of ticks in RDW but the general market is far from positive. The advice on VectorVest is caution. The underlying trend is down and the DEW and longer term Confirmed Call techniques are also pointing down. The general market is 70% of the exercise so my advice is to stand aside until that picture changes. The front page of VectorVest will show that clearly.

On the international markets the Dow had a strong down day and fell to short term support. This is a very important level and marks the conclusion of a 5 wave triangle which I have labelled as a wave 4 of the up wave which started after the Chinese drama of the summer on the 24th August. The fall on Friday was caused by Oil and Oil stocks. The perception in the market (according to Bloomberg) is that the fall in Oil will cause a big percentage of Junk bonds to default.

I have held most of my stocks and only disposed of the laggard during the week. Savills has done nothing for me over the months I have held the share. Getting rid of the worst performer each month is a practice that was taught to me by a very successful SA based investor. It automatically instills trading discipline. BPI.L tested my heart during the week with a plunge but now it’s over that adds to my enthusiasm for the share. Over and over again we see evidence of plunge down and reversal preceding a strong move. Have a look at the chart of JD Sports just prior to its big move up in 2015 for a great example.

Carnival had a good day on Friday and may have (at last) broken from an ascending triangle formation. Fridays outside day bar chart pattern normally causes follow through so with any luck (and a decent market) we should see follow through on Monday.

In conclusion I still believe that we are in a bull market but it’s a very mature bull market. The 17000 level of the Dow is very important and a break south of that level will take the Dow down to 16000. On the LSE we have lots of undervalued shares that have strong earnings potential and safety but the direction, momentum and especially the breadth of the overall market is exceptionally weak.

Watch existing positions carefully. Don’t give back any more than 50% of my profits and stand aside from taking any new positions is what I intend to focus on until the front page of VectorVest tells me differently.

David Paul

December 18th 2015

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