Downside Risk For Wesfarmers

This story features WESFARMERS LIMITED. For more info SHARE ANALYSIS: WES

By Michael Gable 

While the mining/engineering services sector is seeing plenty of downgrades come through here, the next cab of the rank in my opinion are the retailers. I looked at Myer ((MYR)) a couple of weeks ago and wrote about why I felt there was downside risk. The stock has clearly trended down since then. The catalyst for the next leg down will be their third quarter trading update this Wednesday. If Wesfarmers’ ((WES)) recent announcement is anything to go by, MYR could be in trouble here. Speaking of Wesfarmers, the way it is trading here suggests to me that we could see a decent move down. Read on about my thoughts on the chart as I suspect that WES could be a great selling opportunity this week.

Wesfarmers

Last Thursday we saw a breakout in the WES share price (circled). However, what made me cautious at the time was the fact that it gapped up on good volume after such a high run. That could indicate exhaustion. If you look at the daily chart of BHP Billiton ((BHP)), you will see that the preceding price action on WES is almost the identical to that of BHP earlier this year. The resemblance is uncanny. And as you know, that led to a decent drop in the share price. With WES we are seeing a similar situation play out. After a seemingly bullish move up on Thursday, the company announced a downgrade on Friday that saw the share price get smashed nearly 3%. If the share price cannot quickly recover, then we are likely going to see a period of weakness for WES. There is support at the trend line at $42, then some larger support at $40. If that cannot hold, then $36-$37 is a possibility. With broker consensus targets averaging under $40, an oversold condition in the order of 10% under valuations would not be unheard of.

Potential Strategy

For long term holders of WES who do not want to sell their shares, they may consider a covered call strategy up here to help hedge some of the downside. Option traders may also look to short the stock but given Wesfarmers’ status as a safe yielding stock, the move might not happen too quickly so a bear call spread may be the better one to consider.
 

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Visit Michael Gable's website at  www.michaelgable.com.au/.

After leaving Macquarie Bank's Securities Group in 2008 after many years of service, Michael has gained a highly regarded reputation in the financial services industry. As a Private Client Adviser with Novus Capital, Michael has become a popular live commentator and analyst for Sky News Business Channel’s “Your Money, Your Call” program. He is also the author of the weekly stock market report “The Dynamic Investor”.

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management.

Michael deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (Rep. No. 376892) of Novus Capital Limited AFSL 238168 ACN 006 711 995. Michael Gable and Novus Capital Limited, their associates and respective Directors and staff each declare that they, from time to time, may hold interests in securities and/or earn brokerage, fees, interest, or other benefits from products and services mentioned in this website. This website may contain unsolicited general information, without regard to any investor's individual objectives, financial situation or needs. It is not specific advice for any particular investor. Before making any decision about the information provided, you must consider the appropriateness of the information in this website or the Product Disclosure Statement (PDS) or Financial Services Guide (FSG), having regard to your objectives, financial situation and needs and consult your adviser. Any indicative information and assumptions used here are summarised and also may change without notice to you, particularly if based on past performance. Michael Gable and Novus Capital Limited believes that any information or advice (including any securities recommendation) contained in this website is accurate when issued but does not warrant its accuracy or reliability. Michael Gable and Novus Capital Limited are not obliged to update you if the information or its advice changes. Michael Gable and Novus Capital Limited and each of their respective officers, agents and employees exclude to the full extent permitted by law, all liability of any kind, in negligence, contract, under fiduciary duties or otherwise, for any loss or damage, whether direct, indirect, consequential or otherwise, whether foreseeable or not, to the extent arising from or in connection with this website.

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