Chart of the week: Why Next relief rally could start soon

What is next for NEXT?

Shares in NEXT are falling out of bed. For years, they have been the darling of the British high street - but no more. They were even crushing rivals M&S in women's fashions, I recall. But a series of sales disappointments starting around Christmas have dampened investor enthusiasm for the high-flying shares, which are now coming down to earth.

In previous times, sales growth was spectacular, but the outlook is for much lower growth this year.

Here is the weekly chart, showing the rapid rise off the 2009 lows:

The rally from the 2,000p area in 2011 has followed along the blue uptrend line in textbook fashion. But since the strong gap opening in 2014, momentum has been tailing off, which gave a warning that the rally would probably terminate if the market could break below the multi-year trendline.

A break of a long-standing tramline is a trade signal under my tramline methods.

Alert traders and investors were advised to place a protect-profit stop to sell on such a break. That break arrived in December at the 7,500p area, also a short selling signal to reverse positons.

With the shares down to 5,500p on Friday, that was a superb trade in a little over three months - that move of 26% was surely worth going for.

And, on Friday, the market plunged right to the precise Fibonacci 38% retrace of the entire bull run off the 2009 lows. That is very pretty.

Here is a close-up on the daily:

Following the December break on a down gap (a very bearish sign), the market plunged to the 6,500p area and tried to stabilise.

That was when many investors were buying on the theory that the shares were a bargain. They believed that the little dip in sales growth was just a blip and the good times would resume and the market would recover. But I am afraid they were catching a falling knife - the other shoe dropped when the plunge resumed on 24 March with a stupendous collapse of 700p in one day and settled lower on Friday at the 5,500p level.

I have placed A-B-C wave labels on the decline because, to my eye, that is what the form of the decline appears to be. The very interesting feature is that at Friday's low, wave A equals wave C in height - a common relationship. That places Friday's low as the likely full extent of the C wave and a potential major low that could lead to a major advance.

Not only that, but the huge gap in January 2014 has just been filled (see top chart). Market gaps are often closed, even if it takes many months to do it. That closure suggests a relief rally could start fairly soon.

The third clue is that the market has hit the Fibonacci 38% support level.

Outlook

Odds are good that the decline will stall around here and a relief rally of some proportion can get started from around current levels. But the market remains very nervous and just jumping in is a potentially very risky strategy. I would prefer to see more signs of basing action.

But so long as the 5,500p-ish level holds, a rally to the 6,500p area to close the gap would be normal, with possibly higher potential thereafter.

My longer-term outlook for retail shares in general is for turbulent times ahead. I would not hang around too long if targets have been hit. I do not believe Next is a long-term hold.

Update on Glencore

With mining shares now hot in the media, I thought I would update Glencore, which fell a very long way from grace last year. And the recovery has been stunning, with a gain of 160% off the 66p low made last September (with the interim low of 69p made mid-January).

When I last updated the shares, I believed the rally would carry to at least the Fibonacci 23% retrace off the 380p top made in 2014. It has certainly done that, but is currently short of the next Fibonacci level at 38%:

The rally is a C wave within a red wave four and, when it terminates, we should see a resumption of the downtrend. But will the market extend its rally to the yellow zone at the Fibonacci 38% level, around the 185p region?

Let's zoom in a little:

The C wave contains a long and strong wave three - following waves one and two - and is currently forming a triangle, or wedge - and that is a clue that the move out of it will be up. That is based on the observation that a true wedge in the fourth wave position usually precedes the final fifth wave thrust before reversing.

Outlook

Odds favour my target around the 185p area should be met, but the decline off it should be strong. Taking profits around that level appears very prudent.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.