Technical Analysis: Retailers start to slide back

26th May 2009 14:03

Nearly two weeks ago, it was suggested that this year's rise in retail stocks might run into some profit-taking if the FTSE continued to drift back from its highs. It certainly wasn't helped by Marks and Spencer's decision to cut its dividend to 15p a share, after posting a 40% drop in profits, and this has no doubt added to the downward pressure on the sector. While most commentators acknowledge that this was probably a sensible thing to do, given the extent of the profits decline, this hasn't stopped investors piling out of the shares after its rise from its levels of around 210p in January, to the highs of 363p earlier this month. The sector appears to be consolidating in what could be a potential head and shoulders reversal formation. The neck line currently cuts the price axis around 1,330p, and a break and close below this key level could be a precursor to a heavier decline towards the longer term trend line support, currently around 1,116p.Already the Marks and Spencer share price has breached the key 300p support level mentioned last week, and looks to be headed towards the longer term 250p support area over the next few days and weeks.Even though M&S is one of the most high profile retailers, it has been left behind in terms of share price movement over the last 6 months, even though it is up by 31%. The biggest risers over the last 6 months have been companies like Pendragon and Inchcape the car retailers, Debenhams, Topps Tiles and DSG International, all up by more than 100% with Pendragon up by over 300%. These gains do have to be set in the context of their preceding declines, as they are also the biggest fallers in the past 2 years, down by over 65%. For example, Pendragon hit a low of 1.40p in mid December, down from a high of 126.50p in 2007.Given the recent retail sales data some people could be forgiven for thinking that we aren't in a recession, but with margins continuing to get squeezed it is difficult to see how much more in the way of gains we can see coming from the retail sector in the short term. The charts certainly indicate that we may have seen the highs, and a break and close below the sector support, could well trigger a further decline.For periodic TA updates follow me on TwitterAlso read my Investors Guide to Technical Analysis and Level 2