The E-mini S&P 500 is in the sell zone on the weekly chart. Traders can expect a pullback over t...
3 Best Buys in Retail Apparel
10/05/2011 10:42 am EST
These three retail stocks are already outperforming the markets as we enter what is historically a seasonally strong period for the retail sector.
Stocks staged an impressive rebound on Tuesday as the cash S&P 500 went from being down over 25 points to up almost 25 on the close. The Advance/Decline (A/D) numbers also closed solidly positive for the day. It was very encouraging that after a mid-day rally failure, the S&P was able to rally sharply in the last hour.
This increases the chances of a further rally over the short term, and if we get strong market internals, the A/D lines may complete their bottom formations.
The technology sector is showing good strength, but there is another industry group that is outperforming the S&P by a solid margin, but because of the pessimistic outlook for the economy, nobody seems to be noticing.
That industry group is retail apparel, which is historically strong during this time of year, and the RS analysis suggests that this year will be no different. Quite a few stocks in this group look good, and three stocks in particular are performing much better than the overall market. All of them reversed sharply to the upside on Tuesday.
Chart Analysis: Since the close on August 8, the S&P 500 is up just 0.4% while the Dow Jones Retail Apparel Index is up 9.4%. That means it has averaged over a 1% gain for each of the past nine weeks.
- The daily chart shows that after dropping below support at line b, the industry group reversed course to close with nice gains
- There is next resistance at 450 and a close above 464 will signal a test of the all-time highs in the 500 area
- The relative performance, or RS analysis, broke out to new highs on Tuesday after overcoming resistance, line c, in September. It has been in an uptrend since early in the summer
- The daily on-balance volume (OBV) is acting weaker than prices, so volume on a further rally will be important. There is key OBV resistance at line e
- There is fist support at 414 with stronger resistance in the 400-404 area
Under Armour Inc. (UA) is a well-known maker of performance apparel for the entire family, and since the August 8 close at $55.93, it is up a stellar 21.7%, causing those who are long UA to ask, “What bear market?”
- The daily Starc- band at $60.86 was approached Tuesday when the early low was $62.50. UA then rallied impressively to close at $68.06
- There is next resistance at $75 and a close above $78.50 would confirm that the all-time highs at $82.95 will be challenged
- The RS analysis turned higher in late August and surged above its weighted moving average. It made new highs last week, line g, and turned higher Tuesday
- The daily OBV shows a potential bottoming formation, and volume did pick up last week. A break of the downtrend, line h, would be positive
NEXT: Risk-Controlled Entries for Two Other Retail Leaders|pagebreak|
Wolverine World Wide, Inc. (WWW) peaked at $39.48 on September 20 and hit a low of $32.77 on Tuesday before closing at $35.90. It is still up 9.5% from August 8.
- A close above resistance at line a will signal a test of the all-time highs at $43.36
- The RS has turned up sharply and formed a new uptrend, line b. The weekly RS analysis (not shown) is in a long-term uptrend
- The daily OBV has broken through resistance at line c and is acting much stronger than prices
- The weekly OBV (not shown) did confirm the new highs early in the year
- Once below Tuesday’s low at $32.77, there is further support in the $31.30 area
Polo Ralph Lauren Corporation (RL) dropped below the daily Starc- band on Tuesday but also closed strong. It had a range in excess of $11. The stock has done well since the August 8 close, up 15.4%.
- There is next resistance at $140 and a close above $145 will signal a test of the all-time highs at $154.62
- The daily RS analysis is in a strong uptrend, line d, and has made a series of higher highs
- The daily OBV looks similar, as it has also turned up from support at line e. The weekly OBV (not shown) has turned up from its weighted moving average and looks strong
- There is longer-term support now in the $119 area
What It Means: The RS analysis of the retail apparel group and of these three stocks suggests that they should all continue to outperform the S&P as we head into a strong seasonal period.
Until the A/D lines complete their bottom formations, I won’t have hard evidence that Tuesday’s lows have more than short-term significance, but it is definitely a possibility.
How to Profit: All three of these stocks look good for a rally that could continue up to late November or early December. Using stops under the most recent lows has excessive risk, so stops under Tuesday’s lows looks best, though it may take more than one attempt to get correctly positioned on the long side.
Alternatively, all three stocks have options, so a bull call spread might give more staying power, although volume is light in the options on WWW.
For Under Armour Inc. (UA), go long at $67.10 with a stop at $62.16 (risk of approx. 7.4%). Sell half the position at $76.32 and raise the stop on the remainder to $68.62.
For Wolverine World Wide, Inc. (WWW), go long at $35.18 with a stop at $32.56 (risk of approx. 7.4%). Sell half the position at $39.72 and raise the stop on the remainder to $34.92.For Polo Ralph Lauren Corporation (RL), go long at $128.78 with a stop at $120.67 (risk of approx. 6.3%). Sell half the position at $140.52 and raise the stop on the remainder to $132.42.
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