Tesco shares face challenge overhead after tiny retail sales rebound

updated 1428 GMT, 10th February 2015

Tesco has been handed its best news for months after retail data showed it managed to scrape-out its first sales rise since January 2014.

Shares of Britain’s biggest supermarket extended a moderate gain from Tuesday morning to one approaching 3% by early afternoon, after the release of closely-watched retail industry data from market research firm Kantar World Panel.

To be sure, the 0.3% rise in sales Kantar said Tesco saw in the 12 weeks to 1st February does not necessarily represent the start of a clear turnaround of the group’s fortunes.

However, investors are applauding the news because it represents the first sign that attempts by Tesco’s new boss to rebuild the supermarket’s status, on many fronts, may be beginning to have an effect.

Tesco stock has challenged and been defeated by its 200-day moving average several times since late January.

Tesco’s Big 200-daily MA Day

Today’s breach above that level, an event that’s typically seen by traders as significant for a stock’s medium-term prospects, removes a psychological hurdle from the share’s outlook that matches the fundamental significance of Tesco finally returning to sales growth.

In both respects though, the obvious question is this: ‘Is this progress sustainable’?

Certainly there are fair grounds to question how solid Tesco’s retail sales progress is, given that sales rises posted by the established supermarkets merely represent their almost too-late efforts to catch-up with the new low-price environment that the retail sector has been elbowed into by the advent of discount food chains.

Sure enough, Kantar said in its report today that overall spending in Britain’s grocery market grew at its fastest rate since June 2014, up 1.1% over the 12 weeks, but, critically, like-for-like prices fell by 1.2%.

That is, in real terms, price falls have shown no let-up in their decline.

Stock rise has a precarious feel

TSCO.L shares reflect this Pyrrhic victory today.

Yes, the last major MA has been breached on the upside, but note the moving average convergence gauge—the MACD system—will need time to catch up with this positive news, because it had been inverting downwards in recent days.

That suggested good sentiment (fuelling buying of the stock) was losing momentum.

It’s a similar picture in the (blue) percentage price oscillator line, denoting the gross balance of trading in the stock.

It’s narrowly avoided the zero marker today, below which the net activity in the stock would be selling.

Finally, there’s obvious resistance directly overhead now, from a former support line that broke in August 2014.

To demonstrate its capability to make continued gains, the stock ideally needs to brush aside 241 pence levels in the very near term.

Tesco trading volatility flashes a warning

City Index client dealing in Tesco Daily Funded Trade reflects the same improved sentiment on the name as in the stock.

There’s a similar barrier of resistance here too.

In the half-hourly view, momentum (MACD system) is verging on overcooked, though its ‘fast line’ hasn’t crossed back below zero.

Following MACD principles to the letter, as the trading system included in City Index’s AT Pro platform (pictured) does, there’s no ‘sell’ signal yet.

However I’ve attached another tool below the MACD, called the Volatility Quality Index.

The elevation in all of its components is unusually high.

That means there’s an increased risk that the trade could show sharp sudden moves in the near term.

Bear in mind the stock and City Index’s DFT have both advanced about 27% since early December.