Charts Suggest a Further 20% Downside for Olympus

The free-fall in Olympus stock in recent weeks, roiled by a deepening scandal over massive M&A payments which came to light after the sudden axing of its CEO Michael Woodford, took the investment world by surprise. While details of the past deals remain murky, the outlook for its shares is clear, with further downside expected according to technicals.

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The charts suggests there are two sides to the Olympus story. The positive side is that there is no evidence of inside trading shown in this chart. This may be cold comfort to investors still holding Olympus, but its more important than many will give credit for. Inside trading is found in all markets. It is the unfair exploitation of investors by those with inside knowledge. It reveals itself in a number of patterns of behavior, although at times it is well concealed within the normal structure of price activity. We look at some of these patterns in our EWS Trading DVD. There is no obvious evidence of inside trading in Olympus. Everyone is caught in the same boat.

However there were two important tremors that suggested all was not well. These are the two sudden increases in downside volatility and range activity. The first fall on the weekly chart from 2800 to 2100 was achieved in three weeks. This was very different from any of the previous price behavior. Extreme volatility on the downside with large moves is a warning signal. Its the first tremor of a seismic event.

The second tremor was the equally rapid weekly fall from 2550 yen to support near 2025 yen. This is not a pattern of collapse, but these two out-of-range falls are a strong warning signals that all is not smooth.

Olympus was trapped in a trading band. Movement between support near 2000 and resistance near 3050 yen was relatively slow and orderly. The increase in momentum on the downside is a bearish signal. Retrospectively we know it was a signal to run before the market collapsed. In real time it was a signal for caution.

The second side to this story is the negative side. With no inside trading pattern there was no warning of the gap down from 2025 to 1400 yen. Nor is there any reliable technical chart method for estimating where the next support level may be. There is no historical support level to judge this against. A simple trading band downside projection gives a target near 975 yen. This is a technical target and it does not match the previous low near 1225 yen so it must be applied with caution.

For investors holding the stock this is now a recovery situation. This doesn’t mean waiting for the price to go back to 2200. Recovery strategies are discussed more detail in The 36 Strategies of the Chinese for Financial Traders. Essentially investors wait for new price consolidation patterns to develop. They then identify trading opportunities within these patterns and take new positions. The objective is to generate sufficient returns to cover the losses on the main underlying position. This is most effectively achieved using derivatives.

It’s a long way to the bottom of the chart - a fall of another 900 yen or more. This type of fall is possible, although it can also be a drift towards delisting. Revenge investors will trade this falling trend from the short side, again using derivatives, to generate enough profit to recover from their losses.

Neither of these recovery strategies are possible until the price activity has developed more fully, either as a consolidation recovery pattern or as a downtrend continuation.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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