Chart of the week: Can M&S shares rise from the dead?

Less-than-disastrous results this week have potential to trigger a short squeeze, argues our chartist.

Could it be?  Is it possible? After holding to a firmly bearish stance on this share for many many months – and taking excellent profits on my shorts - do I see light at the end of this long bearish tunnel for the battered Marks & Spencer (LSE:MKS) shares?  

If my contrarian antennae that are twitching in a St Vitus Dance are correct, we should be on the verge of a very decent rally phase that would confound the massed army of retail sector shorts. A short squeeze here would surely send them running for cover.

So why am I adding it to my growing Buy Low/Sell High list?  For one thing, I like the super bearish sentiment of the market towards not just this share but much of High Street retail. We should all know by now that major lows are always and everywhere put in when sentiment is very bearish. That is what many traders/investors seem to miss.  They can't help buying high and selling low.

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It is well said that markets exist to punish the majority.

Second, I like the chart patterns that are highly conducive to a reversal. Here is the long-term weekly chart:

Source: interactive investor  Past performance is not a guide to future performance

I have a decent impulsive five waves down off the May 2015 £5.95 high to the recent £1.62 low set on October 10th.  Since then, the market has rallied and is now in a small correction to that surge.  But note the low was made on a strong momentum divergence – a signal the selling pressure is waning.  

The blue line is a multi-year line of support/resistance, so that any push up to it (around the £2.40 area) could result in a further advance to take it above the line – and then we would have a bullish 'overshoot' of that line.  An 'overshoot' is a true selling climax – and a precursor of further bullish action to come.

Here is a close-up of recent action:

Source: interactive investor  Past performance is not a guide to future performance

The chart above shows the recent dip has carried to the classic Fibonacci 62% retrace on a momentum divergence. Odds are high that the reversal is nigh, and my first target is the £2.50 region. Of course, any re-structuring/takeover developments would very likely send the shares above this level.

Interim results are due this week and sentiment is already negative. Any less-than-disastrous numbers may well induce support.

The bottom line: I am warming to M&S as a trade and/or investment. Only a drop below the wave 5 low at £1.62 would send me back to the drawing board.

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John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.