The Tesco share price pulled back and moved into a correction, falling by 11% from its highest level in November last year. It was trading at 425p on Wednesday, down from the all-time high of 481p. This article explains what to expect as technicals point to more downside in the near term.
Tesco share price technical analysis
The daily timeframe chart shows that the TSCO stock price has pulled back in the past few months, moving from a high of 481p in November to the current 424p.
It has dropped below the 23.6% Fibonacci Retracement level at 438p, while the Supertrend indicator has turned red. Additionally, the stock has moved below the 50-day and 100-day Exponential Moving Averages (EMA), a sign that bears are in control.
At the same time, the stock has formed a bearish flag pattern, which is characterized by a vertical line and a small ascending channel.
Therefore, the most likely scenario is where the stock continues falling, with the next key targets being at the 38.2% and the 50% retracement levels at 411p and 390p, respectively.
The bearish outlook will become invalid if the stock rebounds above the 23.6% retracement level at 438p. A move above that level will point to more gains, potentially to the all-time high of 481p.
Tesco has strong fundamentals
Tesco share price has pulled back in the past few months as investors booked profits after a strong surge that saw it rise from a low of 300p in April to a high of 481p in November.
The company still has some strong fundamentals, meaning that the bearish technicals will create a good entry point for long-term investors.
For one, the company will likely benefit from the rising inflation in the UK. Data released on Wednesday showed that the country’s retail price index (RPI) rose from minus 0.4% in November to 0.7% in December last year. This growth translated to an annual increase of 4.2%, its highest level in months.
More data showed that the headline Consumer Price Index (CPI) rose from 3.2% in November to 3.4% in December, while the core CPI remained at 3.2%.
Tesco benefits from a high inflation environment because of the perception that it offers cheap prices. Also, the company benefits from the relatively higher margins.
Tesco’s business is doing relatively well as evidenced by the recent third quarter and Christmas trading statement. The numbers showed that the company’s sales rose by 3.1% in the third quarter, with the Christmas sales rising by 2.4%.
The company has also continued to grow its market share, which has jumped to the highest level in over a decade, helped by investments across the shopping trip and its price match features. Also, it has benefited from the investments in online sales, which rose by 11%.
The company continues to reward its shareholders through buybacks and dividends. It is about to complete its £1.45 billion share buyback program, while the dividend yield has risen to 3.35%
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