Could Sports Direct plunge even further?

Mike Ashley's Sports Direct has lost a fifth of its value since issuing a shock profits warning at 11.30am last Friday. A deterioration of trade on the high street and warm weather means the sports retailer is no longer confident of making the £420 million of cash profit expected this year.

Instead, management now pencils in adjusted underlying cash profit of £380-£420 million for the year to April. The shares have plunged to a three-year low, but this comes as no surprise to Alistair Strang, a technical analyst at Trends and Targets.

He predicted last year that this could happen, and now updates his model to try and make sense of where Sports Direct shares are heading in the weeks and months ahead.

Sports Direct has a tiny little problem. In an article published elsewhere last year, we'd speculated on criteria to give a bottom at 420p and the low of 424p [two hours after Friday's warning] was scarily close to target. What worries are the two circled areas on the chart as the market had gapped the share price DOWN, firstly to break a long term RED uptrend and, secondly, to force the price below a logical initial drop level of 510p. Neither movement fills us with confidence for this lot's future.

The situation now exists of weakness below 420p taking the price to 365p next with secondary, if broken, at a hopefully ultimate bottom of 223p. The reason we call this an "ultimate" bottom comes from the unpleasant detail that any calculations below such a point involve prefacing a target with a minus sign, never a good thing for a share price.

(Click to enlarge)

Of course, it is fairly easy to draw a line and mention the price need only better it to rubbish such a drop potential. Unfortunately, in the case of Sports Direct, this BLUE line is currently at 700p so it needs a miracle to get out of trouble.

In our search for miracles, moves since November have been pretty deliberate, almost as if the market knew what was about to happen. If we draw a near-term trend, the share price need only better 540p to foul the immediate rate of descent as, theoretically, this permits growth to 578p initially with secondary 630p.

While neither aspiration is particularly exciting for those who've been stuffed with an 8 quid turkey, in the event of 630p being bettered, we shall take this as a signal that "bottom is in".

Finally, one worry comes simply from the visuals against our grotty 223p. This returns the price to the level it was at the start of 2012 and thus is believable. Grotty but believable!

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.