Hedging Those Higher Grocery Prices

03/10/2011 10:32 am EST

Focus: STOCKS

Thomas Aspray

, Professional Trader & Analyst

The charts show that two grocers may soon emerge from trading ranges and head higher, offering investors who are feeling the pain at the checkout counter a little payback.

Rising food prices over the past few months have been astounding, even to someone who follows commodity prices like I do. The relative performance, or RS analysis, of the food retail group suggests that the grocery stores have found a way to profit even with the higher prices. So can profits in some of the retail grocery stocks help you hedge your higher food costs?

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Chart Analysis: The long-term analysis of the S&P 500 Food Retail group appears to be completing a long-term bottoming formation.

  • The long-term downtrend (line a) that goes back to the 2007-2008 highs was broken in early 2010, and the lows in the 85 area were retested last summer
  • After the setback in early 2011, a weekly uptrend (line d) has formed
  • The weekly resistance at line c was overcome five weeks ago and key resistance is at 110. If this level is overcome, the next target is in the 118 area, over 10% above current levels
  • The weekly on-balance volume (OBV) has already moved above its corresponding resistance (line e), which makes an upside breakout by the group more likely

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Click to Enlarge

Safeway Inc. (SWY) closed strong on Wednesday (Mar. 9) even though the overall market was lower. The recent tight range does increase the odds of a thrust to the upside.

  • The daily downtrend, line a, is now at $22.20 and a daily close above $22.65 should confirm a completion of the triangle formation (lines a and b)
  • The upside targets from the formation are in the $25.50 area with the 2010 highs at $27
  • There is short-term support at $21.30-$21.80 with more important support in the $20.54-$20.60 area
  • The daily OBV broke out above resistance (line c) in February, and after a pullback, it has turned up once more (line d)

Kroger Co. (KR) has been stuck in a range between $19 and $24 for the past two years. It has been moving higher for the past few weeks, however, suggesting another test of weekly resistance (line e).

  • A weekly close above $24.14 (line e) will complete the trading range and give upside targets in the $28.50-$29 area
  • The 2007-2008 highs were in the $31-$32 area
  • There is initial support now at $22.50-$23.00 with stronger support at $20.50-$21
  • The weekly OBV has moved through its resistance, line f, and was quite strong last week

What It Means: The retail food group, though up from the 2009 lows, has not really participated in the bull market of the past two years. This now looks like it may be ready to change. The technical action in these two retail grocery stocks suggests they have good upside potential, and if you are shopping at these stores and also own the stock, you might feel a bit better about the higher prices.

(In the interest of full disclosure, I am a serious consumer of Safeway's Rancher's Reserve meat, but at this time, I do not own the stock.)

How to Profit: For Safeway (SWY), I would look to buy at $21.68-$21.87 with a stop at $20.33 (risk of approx. 7%). On a move above $23, raise the stop to $21.18, and sell half the position at $23.84 or better.

For Kroger (KR), buy at $22.88-$23.36 with a stop at $21.96 (risk of approx. 5.6%). On a move above $24.50, raise the stop to $23.22, and sell half the position at $27.34 or better.

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