Woolies Due A Correction

This story features WOOLWORTHS GROUP LIMITED. For more info SHARE ANALYSIS: WOW

Bottom Line 06/02/13

EW Trend: Corrective
Price Trend: Up
Trend Strength: Weak

Technical Discussion

LAYMANS:

During our last look at Woolworths ((WOW)) we were looking for a push up toward the $31.00 mark, see another pull-back and then for price to get on with the job and head toward all-time highs.  We certainly got the initial strength though the dip certainly hasn’t materialised.  And taking into account the fact that price action has been almost parabolic in nature over the past few weeks means that an interim bottom is firmly in position.  Not absolutely ideal in regard to the patterns we were looking for though from a trading point of view exactly what was required.  As mentioned last time we couldn’t move to a firmer bullish stance longer term until the upper boundary of the zone of resistance was overcome.  That region seems like ancient history now with buyers almost scrambling over themselves to buy the stock.  In normal circumstances we’d expect old resistance/new support to be revisited but with the broader market continuing to look very strong I’m not convinced a correction of that magnitude is going to occur.  It would certainly present a very good buying opportunity in a few weeks time though for the moment we’ll just have to see how price reacts at the target which is now within touching distance.  Should some selling pressure enter the fray at those slightly higher levels then yes it is still feasible that we’ll get the buying opportunity. 

TECHNICAL:

One thing’s for sure, price action from the November 2012 low is clearly impulsive in nature meaning we have had to amend our labelling.  Bigger picture nothing changes with WOW correcting its way higher though the door is still firmly open for significantly higher levels to be tagged.  It now seems likely that a double zigzag is taking hold which is a pattern that appears to be cropping up quite a lot recently.  These are elongated corrective patterns which are essentially a series of A-B-C corrections separated by an intervening wave-(X).  The interesting thing here is that the wave equality projection of the first part of the correction was hit almost to the cent before the retracement kicked in.  This increases the chances that the wave equality projection annotated here will also be respected although after today's strength it's debatable.  Either way, with the target area just about being achieved we shouldn’t have to wait too long before a definitive answer is given.  It’s worth noting that the most corrective patterns we can have in a combination is three which means any counter trend move lower here could well terminate above the new zone of support which would complete another intervening wave-(X).  We’d then be looking for another substantial leg higher within the final sequence of a triple zigzag.  This of course is assuming that the wave equality projection is going to halt the recent strength.  Whichever way you look at it the fact that the zone of resistance has been overcome in such a strong impulsive manner can only be viewed in a very bullish light.  The only question we can’t answer at this juncture is whether the trend continues right here and now or whether a small corrective move is going to take price back toward the $30.00 mark.  With the evidence right here and now I favour the prior.

Trading Strategy

Looking at the smaller degree patterns and taking into account that the 1.618 projection of wave-i has been tagged we are in a position to see a retracement which could well take the form of a consolidation pattern.  Indeed, a sideways meander here would provide us with a low risk entry with a view to jumping on for the subsequent breakout.  Definitely something to look out for over the next couple of weeks or so.  The alternative is that the new zone of support is revisited although it should take a month or so before getting down to those levels.  However it would again provide us with a low risk entry despite a little patience being required.  As we’ve mentioned over the past few months the heavyweights continue to lead the market higher and there’s no doubting the fact that WOW is now joining in on the fun.
 

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