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British American Tobacco continues move to long term underperformance

January 13, 2014

In October, I showed that British American Tobacco (UK: BATS, US: BTI) was ending its long term outperformance of some UK large cap stocks.

On price, the first moving average crossover since September 2009 is imminent.

BATS price (US: BTI)

BTIPRICE

Moving average crossovers had happened against GlaxoSmithKline, HSBC and Barclays. I recommended waiting for a Bollinger Band breakout on these pairs to identify the timing of the next move in these long term rotations.

As discussed in my December article on the restaurants sector though, the Bollinger Band method should have:

  • Bands that have recently contracted rather than dribbled together for months
  • Bands with a track record of providing good signals on that chart

This is more likely in a trend continuation situation than a break above a long term base, so this method is not really applicable here. Instead, just going with a decisive resistance break has to be the signal.

Barclays (BCS) v BATS (BTI) daily chart

BCSBTI

  • The long term moving average crossover happened in January 2013 at X.
  • The pair has since traded sideways
  • The first ‘Bollinger Band breakout’ (on 40 week bands) occurred in October 2013 at Y, but failed to hold. One possible reason is the 14 day RSI was not strong enough, showing a divergence
  • Now, all resistance has been broken with no daily RSI divergence, so this breakout has a better chance of working

Alternative tactics

An alternative tactic on long term moving average crossovers is to try to buy the bottom of the range. In early November 2013 (at Z), the daily RSI was oversold and the pair was at the support level. The moving average crossover had held for nine months and the pair traded above its 2011/12 base.

In summary

  • Long term moving average crossovers take a long time to play out
  • Timing their advance with a Bollinger Band breakout method can be problematic
  • An alternative tactic is to try to buy the bottom of the range using a daily RSI.
  • The crossover having held in place for a while should provide confidence that it will remain in place

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