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
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.
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.
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