Sports Direct chart breakout could spell big upside

Seven weeks ago, high street budget sports chain Sports Direct published horrible-looking full-year results. Revenue was up, but margins had crumbled and underlying profit had crashed by 59%. But the share price is up over a third since, and technical analysis suggests there could be further upside to come.

Sports Direct had become a pariah stock following all the furore around zero-hours contracts, profit warnings, departing executives and boozy board meetings.

Admittedly, the selling looked to be over given the shares had traded sideways for a year, but few anticipated what has happened since July.

Closing at 300p prior to results day, the share price is now above 400p for the first time since April 2016. Clearly, investors were happy to ignore deteriorating margins, a truckload of provisions and sterling's post-referendum crash, which crushed profits

More interesting was the hiring of turnaround specialist Jon Kempster as finance director, and owner Mike Ashley's insistence that trading in the firm's new generation flagship stores is "exceeding our expectations". Traders also liked his confidence in growing underlying cash profit by 5-15% in the year to April 2018.

In terms of the charts, this sharp move higher is significant.

Having already broken above two potential resistance levels, Sports Direct shares have blasted above a third, more important number. Closing higher than 412p puts the shares above a major level whose origins can be traced back to 2012/13 (see above).

From here, there's a possible hurdle at around 442p, but bulls will point to levels around 513p and 572p where the share price fell dramatically following a damaging profits warning. That followed a prior crash after an investigation uncovered "Victorian" working conditions at its warehouse in Shirebrook, Derbyshire.

These so-called manipulation gaps often get filled over time. Achieve that here and investors could generate big profits.

However, billionaire Mike Ashley may be an accomplished businessman, but he is unpredictable, too. He also warns about "short-term fluctuations in underlying EBITDA, particularly given the continued uncertainty surrounding Brexit".

While the charts look interesting, this is one for the bold. Dropping much below 410-412p may start alarm bells ringing. Bears would sell this one and set a tight stop loss, pointing out that the shares are heavily overbought here. One to watch.

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.