Last Thursday we saw a breakout in the WES share price (circled). However, what made me cautious at the time was the fact that it gapped up on good volume after such a high run. That could indicate exhaustion. If you look at the daily chart of BHP, you will see that the preceding price action on WES is almost the identical to that of BHP earlier this year. The resemblance is uncanny. And as you know, that led to a decent drop in the share price. With WES we are seeing a similar situation play out. After a seemingly bullish move up on Thursday, the company announced a downgrade on Friday that saw the share price get smashed nearly 3%. If the share price cannot quickly recover, then we are likely going to see a period of weakness for WES. There is support at the trend line at $42, then some larger support at $40. If that cannot hold, then $36-$37 is a possibility. With broker consensus targets averaging under $40, an oversold condition in the order of 10% under valuations would not be unheard of.
For long term holders of WES who do not want to sell their shares, they may consider a covered call strategy up here to help hedge some of the downside. Option traders may also look to short the stock but given Wesfarmers’ status as a safe yielding stock, the move might not happen too quickly so a bear call spread may be the better one to consider.
