Buy Call For a2 Milk

This story features A2 MILK COMPANY LIMITED. For more info SHARE ANALYSIS: A2M

Bottom Line 20/03/24

20/3:
Daily Trend: Up
Weekly Trend: Up
Monthly Trend: Up
Support levels: $3.70
Resistance levels: $7.45

Technical Discussion

Reasons to be more optimistic short term:
-Recent results have been taken well by the market.
-Interest income tailwinds on a large cash balance in the 1H could result in upgrades.
-Management has upgraded FY24 and made some upbeat outlook commentary.
-The company has been outperforming in a declining market.
-Impulsive price action has taken hold.

Over the past few months, we’ve been concentrating on the weekly chart of a2 Milk ((A2M)) for one very good reason. It highlights the significant sell-off that commenced in June 2020. Not that it’s our focus of attention, but it puts the more recent price action in perspective. I’ll comment on the larger degree patterns shortly, but this evening we are going to move down to the daily chart. It shows that a decent rally has been unfolding over the past few weeks. Ideally, it’s the early stages of something more bullish. However, as we’ll see in a moment, there are headwinds to overcome so we can’t become highly confident quite yet. Still, steps in the right direction are being taken which is all you could ask for considering the potency of the prior downtrend.

Let’s remind ourselves of what’s been happening on the weekly chart. A reversal pattern has been evolving since May 2021. When a company suffers serious technical damage, a basing pattern of some type usually needs to form before a decent leg higher kicks in. The one here is multi-year which is perfect. There are no guarantees that a breakout is going to materialise any time soon, but price is heading to the upper boundary of the pattern. It now seems likely that base resistance is going to come under pressure in the not-too-distant future. One thing we need to bear in mind is that we saw a similar rally back in June 2022. In fact, that rally was more significant. Either way, bigger picture a comprehensive push up through $7.50 in a move that sticks is required before thinking about a long-term uptrend taking shape.

The daily chart here has been starting to look interesting over the past few months. The headline pattern is the rounding bottom (RB) which is a strong reversal pattern. Visually it’s almost identical to a cup & handle. There are two main differences. As the name suggests, this pattern forms at significant lows. A cup & handle is a continuation pattern so needs a decent trend behind it. Also, this pattern doesn’t need to form a handle, which is the situation here. Either way, it has triggered, with the target sitting around $6.80 as shown. I’m not viewing the target as being a strong reversal zone. It’s merely the measured move out of the R/B.

Trading Strategy

Zooming into the more recent price action shows that a Running Triangle has formed. We like to see the breakout around two-thirds of the way through which is a guideline that’s been met. As such, I am going to make a formal recommendation. Buy following a break through the upper boundary of the pattern at $6.11. Place the protective stop at $5.70 and use a trailing stop to manage the position.

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