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5 Retail Trades for Black Friday - views
BALTIMORE (Stockpickr) -- The biggest day in retail is just a few days away, and that's providing trading opportunities for investors who go looking for them this week.
Black Friday may be a shopping smorgasbord for consumers who are determined enough shake off their tryptophan-induced comas after Turkey Day, but for retailers, it's an equally big deal. Traditionally, Black Friday got its name as the day retailers move into profitability for the year (into the black). Not surprisingly, a good sales showing on Black Friday can make or break a fourth quarter -- and it provides a reliable barometer for the strength of consumer spending.
But we're not trying to predict sales forecasts for Friday. Instead, we're focusing on the technical side of things with five retail names that look tradable before the big day.
One big takeaway should be there are lots of similar setups out there. That's not hugely surprising -- correlations are high in the retail industry, so birds of a feather tend to flock together. As you're about to see, that bodes well technically for retail as a group.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
So, without further ado, let's take a look at five technical setups worth trading now.
First up is Home Depot (HD), the home improvement retailer that's likely to see a run on generator deals on Black Friday, just a couple weeks after Sandy hit the East Coast. But I digress.
Right now, Home Depot is forming a textbook version of the ascending triangle pattern, a setup that's formed by a horizontal resistance level above shares and uptrending support below them. As shares of HD have bounced in between those two price levels, they've been getting squeezed closer and closer to a breakout above that $63.50 resistance level. When that breakout happens, investors have a buy signal for this stock.
The 50-day moving average has acted like a solid proxy for support over the last several months -- that makes it a logical place to put a stop loss on this trade. Remember, it's important not to be early on this trade; resistance at $63.50 has turned away shares the last three times they tried to overcome that price, so it's crucial to see resistance get taken out before jumping in.
Department store giant Macy's (M) is forming the exact same setup right now. Just like Home Depot, Macy's has a horizontal resistance level above shares right now (at $41) and an uptrending support level to the downside. So here too, we want to see a breakout above $41 before jumping on board this trade.
It's valuable to think about how this pattern works in real terms -- after all, patterns like the ascending triangle don't work because of magic or geometry. Instead, it all comes down to supply and demand in the market. The resistance level at $41 is a price where sellers have recently been more eager to sell and take gains than buyers were to buy. But a breakout above that level indicates that all of the excess selling pressure at $41 has been absorbed by increasingly committed buyers.
That's why it makes sense to buy a breakout through a resistance level. Momentum has been tightening over the course of this pattern, a fact that also points to a possible volatility squeeze for Macy's. That means that a sharper move is likely when a breakout does happen, so it'll pay to keep a close eye on shares. In this name, the 200-day moving average has been a better proxy for support -- that's where I'd keep a protective stop if and when Macy's breaks out.
Abercrombie & Fitch
It's been a tough year for apparel retailer Abercrombie & Fitch (ANF) -- shares of the mid-cap clothing stock have slid 10% year-to-date, underperforming the broad market by a considerable margin. But investors look due for a reprieve.
ANF has spent most of the second half of the year consolidating sideways in a channel, bouncing around between resistance at $40 and support down at $30. But that changed last week with Abercrombie's third quarter earnings call -- the firm announced solid numbers that spiked shares by almost 34% overnight. More importantly, it broke ANF out of the channel that had been hamstringing shares in that range. With resistance at $40 long gone, this stock has more room to run higher.
ANF's next meaningful resistance level comes in at $53, giving this stock considerable upside before hitting a pocket of previously known supply of shares. If you decide to bet on more upside in ANF, I'd recommend keeping a tight stop just below $40 -- there's still a lot of volatility in this name.
Target (TGT) is showing the same "rectangle" pattern right now, it's just less far along. Like ANF, Target has been consolidating sideways (in the shorter-term), bouncing between resistance at $64 and support at $61. Now, as TGT makes its way up to test that resistance level, investors could be in for considerable upside.
That's because the resistance at $64 is just a buck shy of a more significant resistance level at $65, a 52-week high for shares. If buyers can leverage their momentum to take out any lingering sellers at $65, then TGT could have a more meaningful move on its hands. Making new highs is significant from an investor psychology standpoint because it means that everyone who has bought shares in the last year is sitting on gains -- as a result, the "back to even" mentality is less of a concern than it would be for a name with a higher proportion of shareholders sitting on losses.
Momentum also looks promising for Target -- 14-day RSI is just on the verge of breaking out of a downtrend that's been in force since back in late August. Since momentum is a leading indicator of price, that's a good signal for this retail giant.
Last, but not least, is Limited Brands (LTD), the specialty retail name behind Victoria's Secret, Bath & Body Works, and La Senza, among others. Limited Brands hasn't looked particularly compelling for the last couple of months -- while shares were in an uptrend from the start of the summer, that uptrend topped out in September and moved into a well defined, substantial downtrend.
But there's still an upside trade to this stock.
That's because yesterday LTD broke out above its downtrending resistance level, sparking a signal that the decline could be coming to an end in this stock. That signal is still preliminary at this point -- with only part of yesterday's session above resistance, we'll want to see shares close above that level again today before it makes sense to actually put money on a trade here.
Here again, momentum adds some extra confidence to what's going on in LTD -- the downtrend in RSI broke at the same time that price did. Still, price is king, so until it gets confirmed in today's session, I'd recommend sitting on the sidelines.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, CMT, is a senior market analyst at Agora Financial in Baltimore and a contributor to TheStreet. Before that, he managed a portfolio of stocks for an investment advisory returned 15% in 2008. He has been featured in Forbes , Investor's Business Daily, and on CNBC.com. Jonas holds a degree in financial economics from UMBC and the Chartered Market Technician designation.