Watch out for the buying opportunity
If Woolworths can overcome current resistance, its share price has the potential of completing a 100% retracement to its all-time high.
though the South African consumer was a tad upbeat going into this festive season, general sentiment remained pessimistic, according to the Bureau for Economic Research’s latest consumer confidence index, released in December.
On the other hand, KPMG expected December spending in the country to be relatively subdued following a turbulent 2016. Consumers were likely to spend mostly on basics, such as foods, clothing, shoes and pharmaceuticals rather than discretionary items, KPMG predicted.
Clothing and food retailer Woolworths also had a difficult year in 2016, with clothing sales in SA and Australia negatively impacted by “an extremely warm winter and consequent very high levels of promotion, as all retailers sought to clear stock”. The retailer said in November that it is seeing sales improve, but that conditions in both markets are challenging.
In the 19 weeks to 6 November, Woolworths Clothing and General Merchandise sales increased by a mere 2%, while prices were up 7%. Sales in comparable stores were 0.8% lower and retail space grew by a net 2.9%. Woolworths Food sales increased by 9.1%, with price movement of 9.2%, it said. Sales in comparable stores grew by 4.9% and retail space by a net 8.3%.
David Jones sales increased by 2.2% in Australian dollar terms, while Country Road Group sales were 2.8% lower in Australian dollar. The group’s debtors’ book showed year-on-year growth of 2% at the end of October, with an annualised impairment rate for the four months ended 31 October 2016 at 6.4% (four months ended 31 October 2015: 5%).
The group’s interim results are scheduled to be announced on 6 February 2017.
Woolworths has been pulling back since November 2015 as a correction from a long-term overextended position. Downside steepened when Woolworths breached the lower slope of its bear channel in November 2016 – eventually landing on its major support trendline dated back to 2011. It has managed to bounce there, as the three-week relative strength index (RSI) recovered from a mega-oversold position. However, the RSI has now formed a lower top, and lower slope of the channel seems to be limiting further gains.
HOLD: Failure to recover beyond 7 250c/share would increase the chances of Woolworths breaching its long-term support trendline – signalled below 6 000c/share. It’s possible that Woolworths will find strong support on its long-term trendline, thereby presenting an attractive buying opportunity for the long term, with potential of completing a 100% retracement to its all-time high at 10 800c/share. Woolworths would outperform most of its peers upon a recovery. With its current price-to-earnings ratio at 15, Woolworths is a keeper. However, it must first overcome current resistance. GO LONG: A neutral long could be initiated above 7 250c/share – Woolworths would have defied resistance, and gains gradually towards 8 700c/share could then ensue. Increase positions at every resistance level breakout. GO SHORT: Woolworths would end its long-term bear trend below 5 485c/share. The downside target would be at 4 500c/share.