UK booze behemoth Diageo has garnered the attention of the public recently, following its foray into the non-alcoholic soft drinks business with an investment in UK startup Seedlip. Most entrepreneurs will be kicking themselves for not thinking of making a truly sophisticated non-alcoholic drink (well, all those except the one that did) – as was I when someone else had the idea of putting something healthy in a bag instead of crisps.

But if you’re thinking of investing in Diageo, it’s worth noting that the stock is also garnering the attention of traders and brokers alike on account of some interesting and well defined technical price moves in the years since 2002. Those currently looking at Diageo’s technicals would not be mad to conclude the stock could be heading for £31.50 (+50% from current levels) in the coming few years.

The relevant analysis here is the Elliott Wave principle which asserts that market sentiment (i.e. the crowd behaviour of market participants) moves in clearly defined trends. R.N. Elliott developed his system on observations he made of the repeated structure of these trends.

The basic structure is as follows: there is an ‘impulse sequence’ consisting of 5 ‘waves’ and a ‘corrective sequence’ consisting of 3 ‘waves.’ This is illustrated below.

                                      Source: StockCharts.com

Now if we look at the below chart on Diageo there’s a similar pattern in the price – 2 impulse moves and 2 corrective moves since the lows of 2002. Thus, are we due another impulse wave – number 5 – to complete the impulse sequence of moves? The thing about technical analysis is that, while it’s as objective as it can be, it’s still not 100% objective and therefore such a completion is not guaranteed. However, Diageo has an advantage in today’s market on account of it being a defensive stock and one whose earnings could be set to benefit from weakness in the GBP post-Brexit vote.

A glance at Diageo’s 12-month chart below sees resistance at 2150p, which is the high point of the 2nd impulse wave. If this is broken, that would likely be seen as a bullish signal that the price could continue to make fresh all-time highs – and perhaps even trace out the 3rd and final impulse wave to £31.50.

You have to remember that the above observation is long-term. In the shorter term the Diageo share price has and could continue to make large percentage moves – both up and down. As such, both time horizon and risk management are important things to consider when deciding how to invest – not just in Diageo, but in any company’s stock.

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