JB HiFi Remains In Downtrend

JB HIFI ((JBH)) operates out of Australia and New Zealand and is best known within the electronics industry where it sells televisions, speakers, in-car entertainment as well as computers and other household goods.  It also focuses on video games, music DVD’s and movies.  It has become more focused on its online store which allows it to be extremely competitive. For the six months ending the 31st of December 2016 revenues increased 24% to A$2.62B. Net income increased 16% to A$110.4M. Revenues highlight the operating section increase of 12% to A$2.23B and the retail sales increase of 12% to A$2.23B. Net income was partially offset by the sales and marketing expenses increase of 23% to A$249.3M. Broker consensus is presently “Sell”.  The dividend yield currently sits at 4.2%.
 
Reasons to be cautious:
→ The pending entry of Amazon into the local market is concerning investors.
→ Risks include rising energy prices, low wage growth and heavily indebted consumers.
→ Brokers and analysts are commonly cutting long-term earnings forecasts by between 30% – 40%.
→ The outlook for the Australian consumer discretionary business appears to be deteriorating.
→ Price is struggling to stay above a zone of support.

It’s amazing what difference a few weeks makes. Around four weeks ago buyers were starting to appear in numbers evidenced by the large increase in volume around the zone of support. Unfortunately, that demand proved unsustainable with a leg lower unfolding almost immediately, taking price down through the lower boundary of the zone of support. On the positive side of things price clearly rejected from those lows last Thursday where price gapped down, only to close near the highs of the day which thus far has staved off a deeper retracement. It’s a multi-year zone of support and there will be many traders and investors looking to buy into weakness around current levels.

The question is, whether the stronger technical picture can outweigh the obvious fundamental headwinds, of which many are mentioned above. Amazon is perceived as being the big bad Wolf although it’s an unknown as to what effect it’s going to have on the sector. One thing is for sure though, it isn’t going to be positive. The bottom line is that JBH is looking over the edge of a cliff here, with a strong push down through last Thursday’s low at $21.92 opening the door for a deeper retracement. On the flipside, it would take an impulsive leg up through the recent pivot high at $25.80 to suggest the deeper retracement is going to be avoided.

At this stage we are siding more with the bears as the smaller degree patterns have taken a turn for the worse over recent weeks. Minor bullish divergence is in place on the weekly timeframe although it’s yet to trigger meaning it can’t be relied upon regarding a rally at this stage. However, it is something to watch over the coming weeks.

Trading Strategy

The more bullish wave count we’ve been running with has now been invalidated. The reason being, wave-4 has now entered the price territory of wave-1 which is one of the core rules that cannot be broken within the Wave Principle. As such the recent pivot high likely completes a larger degree wave-(A) which in turn offers further downside. There is scope for a bounce from current levels although ultimately the typical retracement zone as shown either side of $18.00 should be the next port of call. If you are aggressively looking for shorting opportunities then wait until the prior pivot low at $21.92 is overcome before getting involved.

Considering the fakeout, it may be wise to wait for a close beneath that aforementioned level before initiating short positions. The target is the typical retracement zone as shown. The initial stop should be placed just above the upper boundary of the zone of support at $24.00. There is no formal recommendation at this stage although one may be put forward shortly.