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This article appeared in the May 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

What the charts say for David Jones, JB Hi-Fi, Myer, and Harvey Norman.

Photo of Janine Cox By Janine Cox, Wealth Within

Recent economic data indicates that business confidence and consumer spending will continue to be deflated post-GFC, and therefore you might assume retail shares will not provide buying opportunities for some time.

But always remember that the sharemarket leads the economic data, as it looks to the future. Further, the fact is that "charts" don't lie. The retail sector has been rising in value over recent months, and the exciting thing is that, with interest rate cuts on the horizon, retail spending could be boosted in the second half.

Is the time right to go shares shopping and grab a bargain? If you focus on what is in the media, I don't blame you for staying away from retail companies. But what goes out of favour eventually comes back in. Importantly, if current data is being compared to the abnormal boom times before the GFC, when Australians spent more than they earned, is the data relevant anyway?

(Readers who want a more detailed analysis on the retail sector and the companies in this article, as well as an insight into the companies behind the rise in the consumer discretionary sector, can access a one-hour Wealth Within online session on its website).

Look at the bigger picture

Before looking for shares to buy it is always wise to survey the bigger picture, using a top-down sector or market approach. You can see in the chart of the consumer discretionary sector (XDJ) that it recently traded above the October 2011 high. This is interesting given that the All Ordinaries index (XAO) at the time of writing had failed to do this. From August 2011 the All Ords rose by around 16.5 per cent, and the XDJ by around 19.0 per cent.

First, looking at a monthly chart below of the XDJ, I have applied a number of important price support and resistance levels, and a downtrend line. The trend line, like price levels, will show where a share or market is likely to turn or slow down. You can learn more about trends and drawing trend lines in Wealth Within founder Dale Gillham's book, How To Beat The Managed Funds By 20%.

I have also applied Gann's 50 per cent level and Fibonacci's 61.8 per cent level of the all-time high. These are two very important levels that coincide with natural support and resistance around 1500 and 1100 points respectively, making them stronger. (Editor's note: The ASX Charting Library has information on technical analysis and key terms).

Note how the sector stopped at these levels and turned. This indicates that the sector is likely to meet short-term resistance from the downtrend line overhead before confirming support below at 1100, and before moving back up through the trend line. If support at 1100 holds, it is possible that retail shares are near their bottom.

Consumer Discretionary Sector (XDJ) chart
September 2007 to 2012

Consumer Discretionary Sector (XDJ) chart - September 2007 to 2012

Source: Market Analyst

The analysis gets really interesting as we drill down to the companies within this sector. Four retailers I analyse are David Jones, JB Hi-Fi, Myer Holdings and Harvey Norman Holdings.

1. David Jones (DJS)

Unlike the retail sector, David Jones has continued to fall over recent months. But, like the sector, it is trading below 50 per cent ($2.98) of its all-time high and has moved to test support from 61.8 per cent ($2.28) of the all-time high.

This indicates two things: first, if DJs is anything to go by, prices in the retail space are still depressed with potential to go lower in 2012. Second, that it is trading very close to levels that have the potential to cause price reversal. In my opinion, if DJs fails to hold at around the 61.8 per cent level, it is likely to continue below $2.00. However, a strong rise from here above $2.50 would indicate a good time to pay attention.

In any case, I believe a bottom for this share is likely within the next one to five months, meaning there could be good buying opportunities in the second half of the year.

David Jones (DJS) chart - September 2007 to 2012

David Jones (DJS) chart - September 2007 to 2012

Source: Market Analyst

2. JB Hi-Fi (JBH)

In a relative sense JB Hi-Fi has held up better than David Jones, however, this stock has also broken below the 50% ($11.86) level. The difference here is that JB Hi-Fi appears to be hanging in 'no man's land' between the 50% level and 61.8% ($9.06) of the ATH. Given this, the risk still exists for JB Hi-Fi to fall to around $9.00 before the next run can be sustained. At the time of writing the analysis suggested a possible rise over the coming months could take it back above $11.86, and if it could hold there for a few weeks JB Hi-Fi would be a stock to watch out for. Traders looking for long positions need to be mindful JB Hi-Fi is a stock that is widely short sold by those looking to profit from share-price declines.

However, analysis suggests a possible rise over the coming months to take it back above $11.86, and if it can hold there for a few weeks I believe JBH will be a share to watch, and is likely to have more potential than DJs. Traders looking for long positions need to be mindful that JBH is a share that is widely sold short by those looking to profit from share price declines.

JB Hi-Fi (JBH) chart - September 2007 to 2012

JB Hi-Fi (JBH) chart - September 2007 to 2012

Source: Market Analyst

3. Myer Holdings (MYR)

You might be surprised that Myer has held up reasonably well, with recent price action showing that 50 per cent ($2.01) of the all-time high is so far providing sufficient support to prevent further falls. Also, as $2.00 is a round number it can also provide a psychological level of support. Also important is how, even though we don't have a lot of history on the shares, it appears Myer wants to run between price multiples of around $0.80; the lower level at $2.00, then $2.80 and $3.60.

Like the retail sector, Myer has been trading up over recent months, indicating it may hover at around $2.50 short term. Although Myer looks interesting, the risk for the price to pull back to test the 50 per cent level still exists because support has not been properly confirmed for the current rise to continue.

Myer Holdings (MYR) chart - September 2007 to 2012

Myer Holdings (MYR) chart - September 2007 to 2012

Source: Market Analyst

4. Harvey Norman (HVN)

Harvey Norman is, without a doubt, the performer of the four shares when it runs. That said, people still wonder whether Harvey Norman's inability to move quickly enough into online selling may have cost shareholders dearly.

Looking at the chart, not only has Harvey Norman fallen through the 50 per cent level, it is also trading well below 61.8 per cent ($2.77) of its all-time high price. I have been of the view for some time that Harvey Norman would take out the low it formed in 2009, and recently this occurred. It is possible that Harvey Norman will confirm support at around $2.00 soon. Unfortunately for existing shareholders who have persisted with a buy-and-hold approach rather than selling, a further fall to around $1.50 is not out of the question.

Harvey Norman (HVN) chart - September 2007 to 2012

Harvey Norman (HVN) chart - September 2007 to 2012

Source: Market Analyst

About the author

Janine Cox is an analyst at Wealth Within.

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