Wesfarmers should correct
This stock just hit an important resistance level at the beginning of the month. It posted a high at $24.05 and is now trading around $22.10. We expect a further correction towards $20.
Wesfarmers (ASX: WES) has of course benefited from a rebound generated from mid-February. A low posted at $14.42 on February 11 built the second leg of a double-bottom pattern that reversed the bearish trend. Point B on the chart became indeed an inflection point as the price bounced back sharply there.
The bearish trend drove the price from $38.60 (point C) to a first low at $14.25 (point A) seven months later, then to a second low 2 more months later (point B). Those two lows posted roughly at the same level built the double-bottom pattern.
The rebound drove the price back from $14.42 to $24.05 (point D) in two and a half months. It’s an increase of 67%. This is a fast pace and if you look at the chart, this happened without any significant corrections. The bulls took the lead and some of them have made already decent double-digit gains so far. That’s why a profit-taking period has now probably come.
And what is the best way to assess the right timing for profit taking? It’s the identification of resistance levels of course. The level of $23.75 corresponds to the 38.2% Fibonacci ratio of the bearish trend occurred last year. This is exactly where the rebound has probably exhausted.
Look at the MACD: this is a clear signal that it’s time now to sell back the stock. This momentum indicator has peaked to an extreme high level and has already curved downward. It has also crossed both its moving average line and its ascending oblique support line. A further correction is indubitably expected.
The Relative Strength Index (RSI) and the Money Flow Index (MFI) confirm this bearish configuration.
A pull back towards $20 then $19 is likely as there might be two intermediary support levels.
The trading idea is therefore: SELL WES at $22.10, with a stop-loss at $24.10 and a take-profit at $19.10.
It’s time for a rethink on REITs?
I know, at first sight this title appears like an invitation to commit financial suicide. However, once you have decided to forget all the elements that make you suspicious (fundamentals, economic recession, emotions etc…) and that you just focus on the chart, then you may think about it twice.
For those who are not sure, just a reminder: REITs means “Real Estate Investment Trusts” and is the name of the ASX index that contains around 70 listed trusts. You can trade this index through futures.
The weekly chart gives a global overview of the tumble occurred last year. Actually the historical highest price of the index (ASX: XPJ) was posted more than 2 years ago, in February 2007, at 2,582 points. The low was posted two months ago at 536 points (point A on the chart).
Let me tell you one important thing: the long-term bearish trend may be not over. The technical patterns and tools do not illustrate this. However they argue for a potential further rebound. Let’s see that in details.
First, the long-term bearish trend: it is solidly built by a succession of lower highs and lower lows as shown on the weekly chart. The rebound started in March is well illustrated by the indicators. They suggest a continuation of this rebound.
Both the MACD and the Momentum indicator are well oriented. The MACD is still at a low level and moves above its moving average. The Momentum indicator has spiked during those past few weeks and has just crossed the 100 line.
The Bollinger bands show that the recent bullish price action has made a pause, capped by the moving average of the Bollinger bands. But two main characteristics here may argue for a further bounce. Bottoms made outside the bands followed by bottoms made inside the bands call for reversals in the trend: this is what happened on point A. Then, a move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.
That’s why a continuation of the rebound is possible. In this scenario a move towards 900 points would be the main objective: it corresponds to both the upper Bollinger band and to the previous lower low (point B).
That’s a risky trade but the reward could be worth it: the potential upside is 33%.
The trade idea is therefore: BUY XPJ on the current levels, with a close stop-loss at 630 points (below the recent lows). Place your take-profit a bit below 900 points.
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