Five Below (NASDAQ:FIVE) has shown stellar performance since I declared it a buy on April 10. It has, in the meantime, reached my upside profit target and looks overbought. Active investors and traders could look to short FIVE stock for a trade.
While I am not a fan of solely relying on price action, the fact that technical analysis can be an invaluable addition to market analysis is undeniable. Patterns recognized through technical analysis reflect human emotions and since human emotions are often predictable, so too is the outcome of many patterns … with a good degree of certainty.
For reference, on April 10 I offered FIVE stock as a buy with an upside profit target of $145. Over the ensuing couple of weeks the stock rallied as expected and reached my profit target with a 15% rally. This move is now overdone and the stock is ripe for a pullback to a technically important reference point.
To kick things off with the analysis lets note the multi-year up-trending channel that FIVE stock traced out. Here we see that as the stock approached the upper or lower end it has always paused and or reversed back in the other direction. This has held particularly true over the past twelve months or so.
The latest rally that I called for in early April now has the stock back at the very upper end of said trading range and marginally above its previous all-time highs from 2018. From a trending perspective the stock promises much to ultimately resume this up-trend, but in my eye not before a pause or mean-reversion move lower takes hold.
On the daily chart, we see the nice breakout rally that FIVE stock staged in the month of April as it broke past well-defined resistance as marked by the black horizontal. The rally, however, took on too steep a character by last week to sustain at this rate. This is also represented by the MACD momentum oscillator, which as a result of the recent rally, has reached the upper end of its range, i.e., spelling “overbought” for the stock for the near-term.
On May 1, to kick off a fresh month, FIVE stock pulled back in a classic bearish reversal day, which signaled and confirmed that the stock is ready for a mean-reversion move lower, possibly toward the previous area of technical resistance around the low $130’s (i.e., the black line).
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Thus, active investors and traders could look to short FIVE stock at $140 or higher (or buy at the money puts or put spreads using June monthly options) with a $132 profit target and a stop loss at $148.
Attend Serge Berger’s special webinar: The highest probability candlestick pattern, period. Click here to register.