Woolworths Ltd. holds a large slice of the retail market pie in Australia and New Zealand. It’s the largest food retailer in Australia and one of the two largest in New Zealand, and it also controls major sections of liquor retailing, hotel accommodations, poker machines, general merchandise, petrol stations, and consumer electronic goods. The corporation also has interests in India and Hong Kong, and has announced their intention to enter the home improvement market within their territory, through a joint venture with U.S. building materials giant Lowe’s.

Because everyone purchases groceries, Woolworths is a mainstay and general staple amongst Australia’s blue chip stocks. During a recession and subsequent recovery, many workers prefer to save money through brown-bagging rather than purchasing lunches out, so retail grocery sales tend to remain high and even rise somewhat during downturns. For these reasons, retail grocery firms such as Woolworths are considered defensive stocks—requirements to own during tough times, but generally not the best performers during the upswing in the business cycle, when workers return to dining out.

The Reserve Bank of Australia and any number of pundits are calling the bottom for the downturn Down Under. If this is true, then a medium-term bull run may be over for WOW.

Woolworths on 25 September reiterated their FY 2010 outlook, with sales ex-petrol expected to continue rising in the upper single digits, for EBIT to continue growing faster than sales, and for net profits after taxes to post growth in a range between 8% and 11%. The company’s 2009 annual report, released the same date, showed sales growth of 7.5%, or 8.5% ex-petrol. The P/E ratio is 20.09, EPS 1.50, and Woolworths paid a dividend of 0.56 (1.96%) on 11 September.

In January 2008, WOW began consolidating into a triangle formation, falling from an historic high of 35.05 along a descending (bearish) trendline with successively lower highs. At the same time, it posted a series of successively higher lows, dating from early the July 2008 low of 22.85. This is best seen on weekly charts as shown below:

Not until mid-July 2009 did WOW break above this triangle. However, by that point, the stock had formed a resistance level at 29.50, tested and confirmed several times, again shown below:

If this resistance level continues to hold, watch for a retracement back to the 27.75 level (a 50% retraction from the current uptrend low of 25.97). Should the 29.50 resistance be successfully broken (by the price action closing above that level), then the next resistance level is at 31.00, set in early April 2009.

technical analysis by Craig Liles

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