Retail Stocks Can Still Rock

09/13/2012 10:46 am EST


Thomas Aspray

, Professional Trader & Analyst

Even though the retail sector has been one of the best performers over the past few months, MoneyShow’s Tom Aspray explains why these stocks should eventually move even higher into year-end.

As many continue to question the health of the US economy, this afternoon’s FOMC announcement will reflect the Fed’s opinion of how much help the recovery still needs. While S&P 500 stock futures have been consolidating since last week’s powerful rally, the NYSE Composite has continued to make new highs.

Consensus opinions always make me a bit nervous, as they create the potential for a big disappointment. The improvement in the technical outlook suggests that a sharp correction will be well supported, and it could help reduce the too-bullish sentiment of the newsletter writers.

Many stocks and sectors are overextended currently, so a correction would also create some good buying opportunities. In June, less than 20% of stocks were over their 50-day moving averages, but now 73%-are above their MAs. By comparison, in March prior to the highs, almost 90% of stocks were above their MAs.

On Friday, we get the latest reading on retail sales. Even though this sector has rallied nicely over the past few months, the technical outlook suggests that it still has further upside potential.

Click to Enlarge

Chart Analysis: The SPDR S&P Retail ETF (XRT) has a 31% holding in retail apparel, 16% in specialty stores, 13% in automotive retail, and 8% in department stores.

  • This ETF is up 14.2% from the June low of $55.84, with next resistance at $67.20 and the upper parallel trend line (line a)

  • On the chart, I have highlighted (in red) XRT’s year-end rallies in 2010 and 2011. An equal rally from the June 2012 lows would take the XRT to the $73 area, which is 14.5% above current levels.

  • The weekly relative performance or RS analysis has turned up from its trend line support (line b), and has moved back above its WMA

  • The weekly on-balance volume (OBV) confirmed the highs early in 2012, but is still below those highs, as it has slightly violated its uptrend (line d).

  • The weekly OBV shows no increase in downside momentum, and the monthly OBV (not shown) does look more positive.

  • Initial minor support sits at $62, with stronger levels at $59.50 to $60.50.

Cintas Group (CTAS) is a $5.3 billion apparel company that provides uniforms and other business services on a global basis. In early August, CTAS moved above the March highs of $40.61 (line e).

  • The 127.2% Fibonacci price target at $42.05 has almost been reached.

  • The width of the continuation pattern has upside targets in the $45.50 to $46 area, which also corresponds to the monthly Starc+ band

  • The weekly RS line has turned up from its WMA and is close to making new highs. It has good support at line g.

  • The weekly OBV did confirm the highs early in the year, and has turned up from its WMA, with good support at line g.

  • There is initial support at $40.50, with stronger levels at $39 to $39.50.

NEXT: Reports on 2 More Retail Sub-Sectors


Click to Enlarge

AutoZone (AZO) is a $14 billion auto parts store company that peaked in May at $399.11, then dropped as low as $353.49 in early August (line b). The three tests of this support may mean that the worst of the correction is already over.

  • The 38.2% Fibonacci support from the August 2011 lows is at $348, with good chart support at $344.40 (line c).

  • The chart appears to be forming a flag with trend line resistance (line a) at $379. A close above the July high of $389 would confirm that the correction is over.

  • The relative performance has been declining since early June (line d), because AZO has not been participating in the rally. There is good RS support at line e.

  • The daily OBV did confirm the May highs, but shows a pattern of lower highs (line f).

  • The weekly OBV has just rallied back to its declining WMA, and a move above it would be positive.

Macy’s (M) bottomed in July at $32.31 and hit a high of $40.80 at the end of August. It is currently down 3.9% from the highs.

  • The rising 20-day EMA is now at $37.50, which corresponds to the minor 38.2% support.

  • There is further support at $35.50 to $36.50.

  • The weekly relative performance is above its WMA, but has just turned lower.

  • The weekly OBV made new rally highs last week, and is leading prices higher.

  • The daily studies have turned down, but show no signs of a top.

  • I discussed in last week’s Trading Lesson the rationale for my July recommendation in Macy’s, as well as the 127.2% upside target at $44.67.

What it Means: The short-term action suggests that retail stocks may correct over the near term. The longer-term analysis of the sector and these retail stocks indicates that a correction should be another buying opportunity.

How to Profit: For Cintas Group (CTAS), go 50% long at $40.67 and 50% long at $39.80, with a stop at $38.49 (risk of approx. 4.4%).

For AutoZone (AZO), go 50% long at $359.20 and 50% long at $354.10, with a stop at $346.77 (risk of approx. 2.7%).
Portfolio Update: For SPDR S&P Retail ETF (XRT), investors should be 50% long at $58.86 and 50% long at $58.04, with a stop at $58.22.

For Macy’s (M), we went 50% long at $32.44 and sold half at 37.20. My stop at $38.26 may be too tight, but if stopped out, I will look to get back in.

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS