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.

Finweek English Edition - - MARKETPLACE - Edi­to­rial@fin­week.co.za Mox­ima Gama has been rated as one of the top five tech­ni­cal an­a­lysts in South Africa. She has been a tech­ni­cal an­a­lyst for 10 years, work­ing for BJM, Noah Fi­nan­cial In­no­va­tion and for Stan­dard Bank as part of the re­search team in t

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.

Tech­ni­cal view:

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.

Short-term out­look:

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.

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