Santa Stocks: Waiting for a Correction

As discussed in Part 1, the industry groups that would benefit from a good holiday shopping season have rallied sharply since the beginning of September. The Specialty Retail group that I discussed last time has only corrected slightly from the highs at 327.50, but the group was up 17.3% from the summer’s low of 279.10. We have been waiting for a correction as I thought it would be an opportunity to buy strong relative-strength stocks in several select industry groups. So far, there has not been much of a correction, but the Specialty Retail sector should find good support in the 305-310 area. Let’s examine some other key industry groups, as well as individual stocks within these groups.

Figure 1

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The S&P Retail Composite encompasses most of the industry groups we are watching and its rally appears to have stalled at 467 with the lower close on Tuesday (October 19).  The first chart support now lies at 450 with the 38.2% support and the 50-day moving average (MA) in the 433-435 area. There is much stronger support at 425. The Moving Average Convergence/Divergence Histogram (MACD-His) did turn negative on October 7 after diverging from prices for several weeks, line b. The daily MACD-His formed a nice positive divergence at the July lows, line a, as the weekly had turned higher. Because there are currently no divergences in the weekly studies, the daily sell signal is consistent with a correction, not a change in the intermediate-term uptrend. I would look for support in the 433-435 area to hold.

Figure 2

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The S&P Apparel and Accessories group still looks strong even though it has corrected with the market this week. There is minor chart support at 215 with stronger support at the June highs in the 212 area. The key support comes in at 202-203, which also corresponds to the rising 50-day MA. The relative strength (RS) analysis, which looks at the relative performance of this group to the S&P 500, bottomed in June. The RS formed significantly higher lows in late August, line b, even though the general market was weaker. The downtrend in the RS, line a, was overcome on September 8 and it has since been in a strong uptrend, indicating it has been outperforming the S&P 500. The daily RS could violate its WMA on a further correction, but the weekly RS (not shown) should hold above its WMA. If the industry group is able to turn higher and make new highs, then we may have to until early November for a deeper pullback.

Figure 3

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Finish Line (FINL) is a small cap apparel company that appears to have completed its correction from the April highs. The downtrend (line a) was overcome last week and there is initial support at $15.50 with stronger support at the recent swing lows in the $14.75 area. A violation of short-term support at $14 would be negative with major trend line support at $12.50 (line b). If FINL can move above the April highs in the $18 area, there is long-term resistance just below $20. The daily on-balance volume (OBV) has just broken its downtrend, line c, and is above its weighted moving average (WMA). It will be important that we see heavier volume on a further rally.

NEXT: More Santa Stocks to Watch This Year

Figure 4

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The S&P Retail Department Stores have also had an impressive rally from the summer lows, up 30.5% through last week’s highs at 165.3. The rally has overcome the 61.8% resistance of the decline from the April highs and has come very close to the strong chart resistance at 167, line a. There is initial support now at 155, which is not far below Tuesday’s lows, and the 38.2% support is just above 150. The 50-day MA is a bit lower at 148 and the 50% retracement support is just above 145. On a further correction, I would expect the 148-150 area to hold. The weekly relative strength index (RSI) is positive, while the daily did drop back below its 21-period WMA. The downtrend in the RSI (line b) was broken in July, suggesting that a bottom could be forming. The higher lows in August, line c, and the break through resistance at line d, established an uptrend. If the industry group is able to make new highs over the next week or so, the RSI may form a short-term negative divergence.

Figure 5

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One of the best looking department stores is Macy’s (M), which has had an impressive rally from the July lows at $16.92 as it was over $25 last week before closing a bit lower. It had started to turn lower ahead of the market as unlike most stocks, it was down Monday when most stocks were higher. On the weekly chart, one could make a case for a double top, but the higher highs in the OBV and the breakout through resistance at line b are both positive. Clearly on the weekly chart there is important support at line a, in the $18 area, and then at $17, which corresponds to the July lows. Once above the recent highs, there is some resistance at $26 and then major resistance in the $30 area. If this is a failing rally, the OBV should give us some advance warning.

On the daily chart, the heavy selling on Tuesday is apparent with the 38.2% support just above $22. The more important 50% support level is just above $21, and typically, I would expect the $21.50-$22 area to hold. Clearly, a violation of the support at $20 would be negative. The daily OBV has dropped back below its WMA but looks very strong as it is well above the April highs. The uptrend in the OBV, line d, should hold on a further decline.

Figure 6

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Another department store, Kohls Corporation (KSS), does not look as positive. The weekly chart shows a broad trading range, lines a and b, with key support at $44.06 and the August lows. The decline from the 2009 highs held above the 50% retracement support at $42.80. The trend line resistance now stands at $56.85, and if overcome, the previous peaks are at $59 and $60.90, respectively. The downtrend in the OBV (line c) was just recently broken, which is positive, but the lower lows in the OBV, line d, are not. If you compare the OBV patterns in Kohls with those of Macys, you can clearly see the difference. This does not mean that KSS can not move higher before the holiday season, but it should lag Macy’s. A pullback in KSS should hold the $49.50-$50.50 zone and a decisive close below $48 would be negative.

Figure 7

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Of course, one can’t think about the holiday season without mentioning Amazon.com (AMZN) because it is so widely watched. The weekly chart shows that AMZN has recently broken out of a year-long trading range as indicated by lines a and b. Measured targets from this formation are in the $195-$205 area. There is initial support in the $150-$152 area with stronger support in the $145 area. The weekly uptrend, line c, is currently at $116. AMZN bottomed well ahead of the market in 2009 as the OBV turned positive in January when its downtrend, line d, was broken. The weekly OBV continues to make a series of higher highs and has confirmed the recent breakout. With AMZN so far above support, there is currently no favorable risk/reward entry for AMZN and earnings are scheduled for release after the close on Thursday, October 21.

In the next part of this series, I will update the status of the stocks we have covered in Parts 1 and 2 and take a look at other consumer-sensitive industry groups, including the restaurants, which should benefit from an increase in consumer spending as we head into the holiday season.

Tom Aspray, professional trader and analyst, serves as video content editor for MoneyShow.com. The views expressed here are his own.