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Ocado And The "Quindell" Sell Signal

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Ocado (LSE:OCDO) shares appeared in Lessons From The Financial Markets For 2013
as an unlikely sounding buy on a break of 90p. It may appear in next year’s edition as an equally surprising sell back towards 90p.  The reason is what could be called the Quindell Sell Signal.

Last week there was a lot of soul searching on my part in terms of not wishing to upset fans of Quindell Portfolio (LSE:QPP). Since the beginning of April there had been an unfilled chart gap to the upside, one that while there was no end of day close back below the floor of the gap at 10.25p backed the idea that his stock was a buy for the long haul. Indeed, the only thing that can cancel out such a signal is an end of day close below the gap – an even that occurred on May 8th at 10.25p. Since then the stock has fallen as much as 40% before bottoming out at 7p currently.

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As many traders will be aware, in recent days we have seen intense speculation regarding the future of online grocer Ocado where the prospect of a tie up with Morrison (LSE:MRW) has caused the shares to surge towards 250p – valuing the company which has found turning a profit quite a challenge in recent years at well over £1bn. Interestingly, the momentum to the upside was so great that the shares left an unfilled gap to the upside, with the floor of the gap at 208p. The risk is that as little as an end of day close back below this level could lead to a sharp decline for the online grocer – especially if the deal with present supplier Waitrose unravels.

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Therefore what could happen now in the wake of a sub 208p gap floor close- now known forever as the Quindell Sell Signal, is that Ocado shares witness a decline at least towards the next main support zone from last month around 140p. The problem is that with such “Quindell” moves, the magnitude of decline can vary from just a few per cent, to that of a very chunky proportion of market cap. All will no doubt be revealed over the next few sessions. At this stage only 215p plus – the top of the gap would delay the downside scenario.

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