article 3 months old

a2 Milk: Avoid

Technicals | Apr 27 2023

This story features SYNLAIT MILK LIMITED, and other companies. For more info SHARE ANALYSIS: SM1

Bottom Line 26/04/23

Daily Trend: Down
Weekly Trend: Down
Monthly Trend: Down
Support levels: $3.90
Resistance levels: $7.45

Technical Discussion

Reasons to be cautious short term:
→ Strong infant formula demand and a daigou channel recovery could be bullish catalysts.
→ A downgrade by Synlait Milk ((SM1)) could be seen as being negative for a2 Milk ((A2M)).
→ One of the main risks is that the China re-registration process may cause disorder.
→ There is upside potential in the medium-term earnings margins.
→ The retracement over the past few weeks has been deeper than anticipated.

We’ve been concentrating on the weekly chart of late as it’s been highlighting a potential reversal pattern. The problem during our last review was that the retracement was deeper than we’d expect. Having seen lower prices over the past week, this issue has become more prominent. The rounding bottom is still in play but it’s now a weak example.

Either way, the upper boundary of the pattern at $7.45 would need to be overcome before moving to a firmer bullish stance. It’s going to take a decent leg higher just to hit that make-or-break level. Not impossible, but what the trigger for such a move will be remains to be seen. We are going to move away from the larger degree patterns this evening and concentrate on the daily chart.

On the positive side of things, the smaller degree patterns look more robust than the larger ones. It’s also a simple looking chart which is always positive. Off the May 2022 lows, an impulsive 5-wave move completed wave-(i) in January this year. That should be followed by a healthy corrective pattern, ideally terminating in the 50% – 61.8% retracement zone.

In that respect, we couldn’t have asked for anything more. A zigzag appears to be taking hold, albeit there isn’t too much room for lower prices. A break down through the lower boundary of the typical retracement zone would be a backward step. The further price heads through the 61.8% level, the more concerned we become. It increases the chances of our wave count invalidating which is something we don’t want to see here.

One thing must always remember is that the company has suffered technical damage. Off the all-time high made in mid-2020, the company has declined by over 80% to last year’s low. One thing history tells us is that this is rarely followed by a strong impulsive leg higher. A basing pattern almost always needs to form before a decent rally unfolds.

The rounding bottom mentioned above would have been ideal but it’s looking less likely than it was a few weeks ago. Recent weakness opens the door for a larger basing pattern to unfold. It could take several months or even years before it locks in. It would still be bullish over the long term but would make for frustrating trading conditions before any breakout transpires.

Trading Strategy

It isn’t quite all doom and gloom, especially as price has hit a potential reversal zone. However, in itself, it isn’t a reason to jump on.

There always needs to be a pattern to trade-off, coupled with a low-risk entry. At the end of the day, buyers need to step up around current levels if our wave count is to prove itself. A2M is still one to avoid for the time being.

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).

This report may contain advice that has been prepared by The Chartist Pty Ltd (ABN 40 641 323 051). The Chartist Pty Ltd is a Corporate Authorised Representative (CAR No. 1282007) of Shartru Wealth Management Pty Ltd ABN 46 158 536 871, AFSL 422409. Any advice is considered general advice and has been prepared without taking into account your objectives, financial situation or needs. Because of that, before acting on this advice you should therefore consider the appropriateness of the advice having regard to your situation and your own objectives, financial situation and needs. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. If the advice relates to the acquisition, or possible acquisition, of a product (other than a security e.g. a CFD) then the client should obtain the relevant Product Disclosure Document and consider it before making any decision about whether to acquire the product. Past performance is not a reliable indication of future performance. This material has been prepared based on information believed to be accurate at the time of publication. Subsequent changes in circumstances may occur at any time and may impact the accuracy of the information.

Risk Disclosure Statement

THE RISK OF LOSS IN TRADING SECURITIES AND LEVERAGED INSTRUMENTS I.E. DERIVATIVES, SUCH AS FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER YOUR OBJECTIVES, FINANCIAL SITUATION, NEEDS AND ANY OTHER RELEVANT PERSONAL CIRCUMSTANCES TO DETERMINE WHETHER SUCH TRADING IS SUITABLE FOR YOU. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN FUTURES, OPTIONS AND CONTRACTS FOR DIFFERENCE TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF SECURITIES AND DERIVATIVES MARKETS. THEREFORE, YOU SHOULD CONSULT YOUR FINANCIAL ADVISOR OR ACCOUNTANT TO DETERMINE WHETHER TRADING IN SECURITIES AND DERIVATIVES PRODUCTS IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CIRCUMSTANCES.

Technical limitations If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms

CHARTS

A2M SM1

For more info SHARE ANALYSIS: A2M - A2 MILK COMPANY LIMITED

For more info SHARE ANALYSIS: SM1 - SYNLAIT MILK LIMITED