Somerfield has been a stock that has been performing remarkably well since last October. Like nearly every stock that exists in the stock exchange, this one did also hit a bottom in or around the end of September, but its real foundation from where its recent upward moves commenced, was from a double bottom formation that was formed on the middle of December 2001.
One could go as far as to say that this is a classic double bottom pattern that one would see in many technical analysis books. The last significant high on this stock was at 110p before the fall to 77/78p.There is a strong resistance level at this 110p area and it is not surprising to see that selling pressure has entered just under this level over this past four or five trading days.
Although this stock has rallied remarkably well over this past number of weeks, there is now a high probability that this retracement that has already begun will continue in the short-term. However, providing this retracement does not bring this stock below the 90p area. I would say that the strong overall up trend that has been in force would still be in place. Therefore this retracement should only act as a further opportunity for one to enter into a ‘long’ trade.
This should only be initiated upon a strong buying pressure set-up day. On the other hand, if the 90p area was broken to the downside, I would be less confident that this stocks up trend was still in force and therefore would be very wary of taking a ‘long’ signal. The more likely signal to then initiate would be that of a ‘short’ trade if this were to happen.
Sainsbury
Sainsbury is that of another supermarket stock that has been performing very well. Again like Somerfield, these most recent upward moves have been taken from a support area in place from the middle of October. However, unlike Somerfield it was not a double bottom formation, but rather a higher low formation. Technically one could say a supposedly stronger signal.
The previous significant high on this stock was at 396p in the middle of November and in similar fashion to that of Somerfied, it is no surprise to discover that selling pressure has very recently entered this stock just below this level. There certainly is no confirmed retracement signal yet and until that is in place, this stock could well yet take out this previous resistance at 396p, before a proper technical retracement commences.
A confirmed retracement signal would only be confirmed providing a low and close below 375p was in place. If this were to happen and providing 396p had not being broken through to the upside, there would then be a good probability of a continued retracement to near the 360p area. This would still not negate the strong upward trend that Sainsbury is currently in but should be an opportunity to enter or re-enter a ‘long’ trade.
Please Note, a more aggressive ‘long’ trade could be taken on this stock, if it were to break and close up through the 396p area without a confirmed retracement below 375p having been reached. This would be technically known as a ‘breakout’ trade.
Ian Foster is a full time trader and director of “STB Trading”, a company specialising in training seminars for the private investor/trader who wishes to learn how to trade the financial markets successfully. He has been trading the markets for over ten years and on a full time basis for the past 5 years. Foster writes his columns from a personal view. At the moment of publication Foster did not hold any position in the above mentioned shares however positions can change at any moment. The information in this column is not meant as professional investment advice or as advice to do certain investments. Your feedback is welcome at ian@citycomment.co.uk.