Brennan Basnicki's  Instablog

I met with a noteworthy hedge fund manager in London a couple weeks ago who had mentioned he had recently closed a position in Burberry (BURBY.PK, BBRYF.PK, BRBY-LON). While he himself was more of a fundamentalist, he acknowledged the value in technicals, despite not typically employing them. Given that, I decided to write a brief TA on Burberry that isn't too technically wordy and just examines some basic concepts. The objective of this article is two-fold; first to show how technicals could have been of value for investing in Burberry, and second, to provide a basic technical analysis of Burberry. Previously I had never looked at Burberry as my focus is on North American equities, however it appears to be an excellent stock to trade or invest in using technical analysis as many textbook patterns have been seen.

If we first look at a long term chart we can see there was an extended bull run from the 2009 lows. That trend broke in summer 2011 and has been dead money to any long term investor since then. The weekly chart illustrates two opposing patterns, both not complete, that have significant projections. The consolidation from 2011 onwards looks to be forming either a bullish "bull flag" or a bearish "head and shoulders pattern" forming. Neither of the two patterns is complete, and until either is, any long term position is dead money. The following two charts illustrates the two patterns:

Bull Flag implying further upside?

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Or head and Shoulders pattern implying a significant move down? (Note the head and shoulders can also be viewed as a double top, however both patterns have the same implications.)

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The price action in the summer of 2011 was the first obvious sign that the previous trend was over. Price action was extremely volatile and characteristic of a market top. Note the significant stock declines on high volume; a telltale signal that the trend was over and distribution was taking place. This also corresponded with a break of the long term up trend, most clearly visible in the final chart of this article. At the point where such a trend line is broken and such clear distribution is seen, one can confidently conclude the previous trend was over. For any long term investor, this means potential profit taking until signs of a new trend, either up or down, are seen.

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I noted the potential "bull flag" in the long term chart. There was also a shorter term bull flag/pennant formation that looked to be preceding an extension of the uptrend in early 2012. However note the low volume that accompanied the breakout. One looks for relatively high volume on breakouts in order to confirm price action. Not surprisingly, the rally out of that congestion stalled at the previous highs. This failure suggests further consolidation or bearish price action.

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Century numbers are well known for their significance, and Burberry seems to be no exception. The 1000 level has acted as support multiple times, and currently serves as the neckline of what could be a head and shoulders pattern. In fall 2010, 1000 seemed to hold as resistance as typically expected. Once however price broke up, 1000 became support; being test four times since originally breaking the level. That being said, this is a critical level. A break below 1000 on significant volume would be very bearish. Note that while the 1000 level was precise in Sept/Oct 2012, I would use the area from 1000 - 1040 as the level in this example.

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If however 1000 holds, the head and shoulders could be negated (as they often are), and the pattern could very well be a bull flag suggesting significant more upside potential. A look at the shorter term chart can make this trade a little more precise. If the December 1300 - 1325 highs are taken out, and the downwards trendline that began in April 2012 is broken, a first clue of the longer term bull flag break out will be evident. Not that while price did break above 1325 on Friday, price failed to close above this level. A close above 1325 with increasing volume would be a first bullish clue, while a failure and reversal from here would be bearish (I would suggest this to be a critical level). A second break above the 1400 provides more justification to be bullish, and finally a close above 1600 would negate the head and should and suggest a continuation of the previous uptrend. One could also argue that there exists an "inverse" head and shoulders here with the downtrend being the neckline. This has bullish implications.

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The gap down in September was a very common technical setup. After further decline on September 11th, there was a large volume and price spike on October 11th that completely negated previously bearish price action. Such as spike often leads to the entire gap being filled, and this example is no exception. Any astute traders could have bought in anticipation of the gap being filled, which it was. The top of any gap is often a resistance area, and again, this example is no exception.

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Conclusion

Charts consistently change, and price action always needs to be monitored. At present the charts looks somewhat bullish, however one should wait on the sidelines until confirmation of a new trend is scene. Basically, one should wait until price has broke beyond either of the thick blue lines in the weekly chart below.

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It appears that price is breaking out to the upside, and an uptrend may resume. For a long term trade I would consider buying if price consolidates above 1325, with a stop just below either 1200 or 1120. If however the 1000 level is broke, then look for price to trade down to 600 - 700 where there appears to be the first area of significant support.

A more thorough technical analysis would look at point and figure charts, Elliot Wave, and other standard tools such as MACD, RSI, Stochastics, etc…, but that is beyond the scope of this article.

For a free preview of a trading and technical analysis service of a partner of mine, click here

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.