Not Time To Buy Woolies

This story features WOOLWORTHS GROUP LIMITED. For more info SHARE ANALYSIS: WOW

 

Bottom Line 27/06/17

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Up
Support levels: $24.00 / $23.13 / $22.23 / $20.50 – $19.76
Resistance levels: $27.71 – $28.03 / $29.22

Technical Discussion

Woolworths ((WOW)) has interests in food, liquor, petrol, hotels and New Zealand supermarkets.  The latter is engaged in the procurement of food and liquor for resale to customers in New Zealand.  The hotel section is engaged in the provision of leisure and hospitality services which includes food, alcohol and accommodation as well as entertainment and gaming. For the 27 weeks ending the 01st of January 2017 revenues increased 3% to A$29.16B. Net income before extraordinary items decreased 61% to A$806.7M. Revenues highlight the Australian Food section increase of 3% to A$18.71B and the New Zealand Supermarkets section increase of 6% to A$3.07B.  Broker/analyst consensus is “Hold”.  The Dividend yield at today’s price sits at 3.0%.
 
Reasons to be cautious:
→ The risk of a price war has subsided.
→ Recent results show that sales were up and margin shrinkage improving.
→ Balance sheet pressure is easing due to the petrol divestment.
→ Big W CEO has resigned after less than a year in charge.
→ There is still downside risk to earnings.
→ More changes in the business strategy are on the cards.
→ The speed of the recovery in profits is looking more questionable.

Over the past few weeks half of Woolworths board have bought stock which comes following the March trading update. In fact, four board members have doubled their holdings on average. This is a vote of confidence although one thing is for sure, you shouldn’t buy solely on the back of directors Holdings. Despite having inside information management can, and do get it wrong – especially in terms of time. Be this as it may, we’ll continue to concentrate on the patterns. We looked at the monthly chart last time which showed that there was still upside potential, even regarding a bounce only. This is still our expectation although over the short-term the risk is to the downside, albeit a shot bounce could unfold from current levels.

From the July 2016 lows, a corrective pattern higher has been unfolding which culminated in locking in wave-(a) just short of the annotated wave equality projection. The depth of the subsequent retracement opens the door to head down toward the typical retracement zone just beneath $24.00 over the coming weeks although this shouldn’t be a straight-line decline. It needs to unfold in 3 clearly defined waves, or at least a series of corrective patterns. Should this unfold then another good buying opportunity could present itself at those slightly lower levels, albeit it’s going to be several weeks down the track. On the divergence front, the bullish variety is evident on this daily timeframe which has also triggered.

A large increase in volume was also evident on the run-up to the recent lows made a week ago which once again opens the door for a rally to unfold from here. This could continue up toward $26.60 but it would take a push above that level before thinking in terms of avoiding the deeper retracement further down the line. On the weekly chart (not shown) bearish divergence is still apparent although our oscillator is now within touching distance of the oversold position meaning it shouldn’t be a headwind for too much longer.

Trading Strategy

Should a lacklustre bounce unfold from current levels as expected, a shorting opportunity could be around the corner although any subsequent weakness should be limited to the typical retracement zone between $24.00 – $23.13. We’d prefer to be buyers at those aforementioned lower levels further down the track meaning patience is going to be required before another buying opportunity presents itself. Bigger picture, it’s still difficult to get overly enthusiastic at this stage.
 

Re-published with permission of the publisher. www.thechartist.com.au All copyright remains with the publisher. The above views expressed are not by association FNArena's (see our disclaimer).

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