1 Stock to Buy, 1 Stock to Short: Fashion Retail

Two opposite continuation diamond patterns

   

Though delia*s (NASDAQ:DLIA) and Urban Outfitters (NASDAQ:URBN) market quite differently to their clientele, I would  hazard that there is some crossover appeal for trend-conscious hipsters. Unfortunately for DLIA, URBN’s approach seems to be doing much better for their stock.

Buy the Bullish Continuation Diamond

5 8 13 urbn 300x187 1 Stock to Buy, 1 Stock to Short: Fashion Retail
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Urban Outfitters and Anthropologie, two of the lifestyle brands owned by URBN, cater to young people with a retro, hipster  sensibility–at different price points (Anthropologie being more of a boutique-style store). This kind of diversification has served the stock well. It has developed a bullish continuation diamond over the past 45 days.

A bullish continuation diamond occurs when the price breaks upward out of a consolidation period, as you can see in the first half of 2013 on the chart. This  breakout suggests a continuation of the prior uptrend.

The pattern begins during a downtrend as prices create higher highs and lower lows in a broadening pattern. Then the trading range gradually narrows after the highs peak and the lows start trending upward. When the price breaks upward out of the diamond’s boundary lines, it marks a continuation of the uptrend we saw in late 2012.

Recommendation: Buy URBN for a $45.50 – $46.30 target.

Short the Bearish Continuation Diamond

5 8 13 dlia 300x189 1 Stock to Buy, 1 Stock to Short: Fashion Retail
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The market for DLIA’s brands–delia*s and Alloy–seems to be a younger, more mainstream  crowd, but the clothes are not dissimilar from those of Urban Outfitters, and the stores do not include apartment wares. These are likely not the only reasons this stock trades for only a few cents, but it goes to show how important it is to create a distinctive niche.

DLIA has developed a bearish continuation diamond, the reverse of URBN’s pattern, over the past 52 days. The downtrend has already begun but since the stock trades so low, a further 11% drop is possible.

Like the bullish continuation diamond, a bearish continuation diamond begins with a consolidation period that shows higher highs and lower lows, then the price breaks downward rather than upward. You can see this on the chart around early April.

Since the price broke downward out of the diamond’s boundary lines, it marks the resumption of the prior downtrend.

Recommendation: Short DLIA for a $0.70 – $0.76 target.

InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the OpenParabolic Options and Trending123.  Trending123 members receive access to the Trending123 Pattern Scan powered by Recognia free as part of their membership. For more information on which service is for you click here.


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