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Trade insight example

Pick n Pay Stores Ltd

16 October 2014 

Pick n Pay has produced a solid set of results for what has been a challenging period for most retailers where shoppers are becoming more and more price sensitive. The company has been focused on cost saving and driving operating efficiency. Trading profit has increased by 21.8% and the company has seen an improvement in working capital meaning stronger cash generation and a saving on net interest paid. The company opened 46 new stores over the period and is on track to create over 3,000 new jobs for the financial year, investing R110 million on improving existing stores. There are now 1,117 stores under group management, of which 665 are company owned and 452 are franchise stores.

Technical analysis

Technically there has been a lot of broad-based weakness across equities and we have seen a number of stocks displaying bearish patterns, like the potential small head and shoulders below. A break below the neckline with an increase in volume would see the pattern come into play, targeting previous support at 5000c. This should in theory caution against further weakness. However the concern here is that this type of bearish pattern is generally considered a reversal pattern at price highs after an extended bullish move upwards as opposed to a continuation pattern.

What can be seen from the chart is the increasing volatility in price, highlighted by the green dotted support and resistance lines A & B. The alternative scenario here is that the price may be consolidating after a steady upward move from August of last year. This would lend itself to a more bullish move upwards with the 200day moving average (red line) as support, the catalyst being the positive results. The 50day moving average (blue line) may be considered the initial target for this move upwards and prices of 5800c and 6000c as the next.

Caution should be exercised due to the volatile nature of the current market, risk from broad-based weakness and careful attention should be paid to any economic data being released as this may have a material effect on investor sentiment.

Pick n Pay Stores Ltd, 15/10/2014

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