Retailer The Gap, Inc. (GPS) sold off last Friday to the tune of more than 11% on the back of a couple nasty headlines. For one, Gap reported a 3% decline in its September same-store sales vs. a 6% rise in the year-ago period, disappointing analysts, who were expecting a 1.6% rise in comparable sales. Additionally, Japanese broker Nomura lowered its price target on Gap stock from $42 to $40 after initiating coverage just a month ago, though it did maintain a “neutral” rating on GPS.
The news slammed Gap stock right at the open, and shares plunged below their 200-day simple moving average for the first time since January — all of which came with a major spike in volume. GPS never made much of a bounce attempt, indicating the selling was for real.
Of course, the writing for more weakness in GPS has been on the wall for some time, particularly since Gap stock broke out of a bearish formation and below its September 2011 uptrend last last month. After a broken multiyear uptrend followed by a big-volume drop below an important moving average, where does GPS stand to trade in coming weeks?
Last Friday’s selloff brought Gap stock down to a last support line, which is the 61.8% Fibonacci retracement of the rally off GPS’ January lows and into the August highs. Traders looking to play the stock from the long side are better off waiting for Gap to stabilize and form a better base where risk can be more clearly defined.
Quicker traders considering the short side of Gap stock could use the 200-day SMA, currently near $38.70, as a backstop to trade against, and an area in the low $30s as a potential price target.
GPS is scheduled to report earnings Nov. 21 — an important date for traders to circle regardless of time frame.
Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here. As of this writing, he did not hold a position in any of the aforementioned securities.