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5 Retail Trades to Take Before Black Friday - views
BALTIMORE (Stockpickr) -- We're just a few days away from the most important sporting event of the year. No, it's not the Super Bowl or the World Cup. I'm talking about Black Friday.
Black Friday, after all, is the one day each year when mild-mannered suburbanites become ruthless competitors, hurdling clothing racks and shot-putting purchases across cashiers' scanners at high speed to get the best deals. Black Friday is also some very high stakes competition -- ShopperTrak estimates that consumers spent a whopping $11.2 billion in last year's bargain frenzy.
For retail stocks, there's no single day as important as Black Friday. That's true even in many retail names that don't actively participate in Black Friday sales. Not surprisingly, all of that attention on a single sector means that there are trades to be made in retail stocks this week.
So, while shoppers get ready to save on Black Friday, we'll get trade to trade with a close technical look at five retail stocks making moves this week.
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.
Without further ado, let's take a look at five technical setups worth trading now.
If you're in the market for a good deal on a cordless drill, home improvement chain Home Depot (HD) is a good bet on Friday. But it's the price action in shares that's flagging our attention this week. After pushing 29% higher since the start of 2013, HD is indicating higher ground in the near-term.
That's because shares of Home Depot are currently forming a textbook ascending triangle pattern, a bullish setup that's formed by a horizontal resistance level above shares (at $80 in this case) and uptrending support to the downside. Basically, as HD bounces in between those two technically significant price levels, it's getting squeezed closer and closer to a breakout above that $80 price ceiling. When that happens, we've got a buy signal in shares.
Relative strength has been bleeding off as the ascending triangle set up in shares of HD, now, with a breakout in relative strength this week, shares look ready to move through $80 on a sustained basis. When it happens, I'd recommend keeping a protective stop at the 200-day moving average.
Burger King Worldwide
Even fast food chain Burger King Worldwide (BKW) isn't passing on the Black Friday bargains -- but it's the rectangle pattern in shares that investors should be paying attention to this week.
Burger King's rectangle pattern is a consolidation setup that's formed by a pair of horizontal resistance and support level at those $21 and $19 price levels. The rectangle pattern gets its name because it basically "boxes in" shares between those two levels; the signal to watch is the break outside of that box. Shares are testing a $21 breakout in today's session, but we'll want to see that move get confirmed tomorrow before it makes sense to jump in.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Rectangles, triangles, and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable/ Instead, it all comes down to supply and demand for shares.
That $21 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Don't be early on this trade...
Department store chain Macy's (M) has been showing traders some outstanding relative strength in 2013. The very same week, in fact, that peer J.C. Penney (JCP) is getting pulled from the S&P 500 because of lower market value, Macy's is actually pushing into multiyear highs. Here's how to trade it.
Macy's has spent the last few months forming a rounding bottom setup. The rounding bottom looks just like it sounds; it indicates a shift in control of shares from sellers to buyers. The buy signal for Macy's came on a push through $50 resistance, a move that just got confirmed this week. With shares definitively catching a bid above $50, now's the time to be a buyer.
Momentum, measured by 14-day RSI, adds some extra confidence to the Macy's trade. That momentum gauge has been in an uptrend since the beginning of October, pushing into the high end of its historic range. Overbought momentum isn't a reason to avoid Macy's. Statistically, stocks that go overbought are more likely to get more overbought in the market sessions ahead.
If you decide to buy here, keep a stop on the other side of $50.
Kohl's (KSS) is another department store operator that's been dramatically outperforming its peers this year -- and another one that looks buyable right now. Don't worry, you don't need to be an expert technical analyst to figure out what's so attractive about this stock. A quick scan of the chart will do.
Kohl's is currently trending higher in a well-defined price channel, a setup that gives us a high probability price range for KSS' shares to trade within. Now, with shares bouncing off of trendline support, we're coming on a timely buying opportunity. Buying at support has proven prescient each of the last several times KSS has tested the support level that it established in January.
Despite the length of the uptrend, Kohl's relative strength continues to be holding up, which means that Kohl's is still rallying harder than the S&P 500 this year, even though we're 11 months into the uptrend in this retail stock. That relative strength staying power adds some confidence to buying a position in KSS this week.
Last up is Dollar Tree (DLTR), a stock that's showing the exact same price setup as the one in Kohl's. This deep discount retail name is forming another uptrending channel trade. Just like KSS, the high-probability trade in DLTR is to buy the bounce.
Buying off a support bounce makes sense for two big reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring the Dollar Tree can actually still catch a bid along that line.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
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.
Follow Jonas on Twitter @JonasElmerraji