One of the big conundrums as far as technical analysis is concerned, which never seems to entirely go away, is how much to allow fundamental factors to influence your decision. Clearly, the purists will only go by the lines and squiggles they see before them on the screen. But of course, with many situations it can be that the fundamentals really do tower over a trader, be they a chartist or not.
This is currently being seen ahead of the latest interest rate decision from the ECB due out on Thursday, and of course the non-farm payrolls from the US on Friday. The former factor has clearly delivered a sizeable dip for Euro / Dollar over the past couple of weeks, while uncertainty ahead of the May jobs data means that the recent strength for indices has rather run out of steam.
On the major markets front you can almost take it or leave it in terms of whether to add in the fundamentals or not. But for an individual company ignoring the hype can be rather more difficult.
In fact, I would go further than this by saying that for a familiar company like Tesco (TSCO) it is almost impossible to resist the temptation of adding a fundamental slant on a technical take. There is however a problem in doing this. Price action is said to factor in existing and forthcoming fundamental input, and therefore the current plight of the grocer as reported in the financial press casts a very dark shadow on the stock, one which all but the most robust of bulls may have difficulty in resisting.
On the face of it we are expected to remain bearish of Tesco given the way that the headlines are reporting the loss of 1 million shoppers a week. While this is admittedly an emotive headline, most of us will be aware of the structural problems facing a company which was the UK’s number one in its space for so long.
What has been obvious for many years is that, given what was effectively a supermarket cartel in the UK until relatively recently, the entrance of discounters such as Aldi and Lidl was always going to have a detrimental effect.
The questions were how long it would take for this looming nightmare to pan out, and whether Tesco, and to a lesser extent Sainsbury (SBRY) and Morrison (MRW) would be able to rise to the challenge? Unfortunately, it would appear that Tesco’s current plight is somewhere between extremely challenging and Mission Impossible.
Ironically, the situation is now made worse given how easy a ride the group clearly had in its heyday of the 1980s and 1990s when the competition was so far behind. Indeed, the main hope now for Bulls of the stock on a fundamental basis is simply that the market has overplayed the negativity and an intermediate positive reaction for the share price is now overdue.
That said, looking at the daily chart of Tesco it can be seen that there is a falling trend channel in place since November last year, with the resistance line running at 300p. This would imply that in order to reassure substantially we would have to see a weekly close back above the 2013 resistance line.
The ideal scenario for cautious traders and investors is that recent May resistance at £3.20 is broken after a major higher low above 300p in the wake of the latest Q1 like for like sales numbers. This may not be much of a glimmer of hope, but it is a start. Otherwise, from a technical perspective the message is that below 300p still risks a retest of the sub 280p 2014 floor before a lasting recovery can be anticipated. The chances of this occurring would increase significantly on any break of the 50 day moving average at 295p.
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