Three Shorts in the Retail Space

10/12/2016 9:00 am EST

Focus: STOCKS

Joon Choi

Senior Portfolio Manager, Research Analyst, Signalert Asset Management LLC

Technical expert Joon Choi, contributing editor to Systems & Forecasts, sees downside risk in retail stocks, highlights a trio of short sale opportunities.

Last month, the Market Vectors Retail ETF (RTH) completed a negative divergence between its monthly price and MACD, thus suggesting the stock market may be heading lower.

In addition, three of the top five holdings in RTH also formed the aforementioned pattern, which led me to recommend shorting the stocks.

Since this negative divergence formed my three recommended shorts -- Costco (COST), Home Depot (HD) and Lowe’s (LOW) -- were hit hard falling 5.4%, 5.1% and 6.8% respectively.

All three stocks had significantly outperformed the S&P 500 Index since the stock market bottom in March 2009.

I believe investors are taking profits on stocks that appreciated considerably more than the S&P 500 Index during the current bull market. This type of behavior may continue as the bull market gets more mature.

Below, I am updating my recommendation to short select ideas in this sector, and providing downside objectives for the three stocks.

Costco

The recent price decline has led to a “head and shoulder” formation which suggests that more stock weakness could be in the cards for the next few months; especially if Costco penetrates below the uptrend line from 2010.

I believe the support level for Costco is $122 which is about 18% lower from the current price. Thus, my target profit for this short position is 23%.

Lowe’s

This stock is also sitting at a key uptrend line stemming from 2012. Although there is no “head and shoulder” formation, I believe the downside risk is greater.

The target price for this stock is $50, which is approximately 30% from current level. That means the profit potential for this position is 36%.

Home Depot

Of the three stocks, this has held up the best. As a result, the stock is still above the uptrend line from 2011.

There is strong support at $107, which is 16% lower from the current price. The total profit potential is 23%

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By Joon Choi, Contributing Editor to Systems & Forecasts

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