Shares of retailer Target (NYSE:TGT) rallied a cool 20% on Wednesday, following the company’s latest earnings report. While the company has been embarking on an impressive growth spurt, at these levels TGT stock seems to be getting overbought and nearing a setup to short it for a trade.
To be clear, I understand and am impressed with the turnaround in Target, as a company, from a top line growth perspective. That really is why TGT stock rallied so sharply on Wednesday.
I can’t help but notice, however, that many financial pundits on the back of these retailer earnings are highlighting how strong the U.S. consumer is. For what it’s worth, as we always want to keep our eyes wide open for all possibilities, global and U.S. economic data has been deterioration over the past 12 months. And, maybe most importantly, the U.S. consumer is always the strongest at the peak of the cycle. The question is, how much stronger can the U.S. consumer get from here? In my eye, not much.
TGT Stock Charts
Moving on to the charts, we note that the multiyear weekly chart displays a stock that has largely moved higher within a well-defined range. We also see that this most recent rally now has the stock once again pushing up toward the very upper end of said range where it should find resistance once again.
Hence, the question — does one really need to chase TGT stock higher after a 20% one-day rally toward long-term technical resistance?
On the daily chart, the bulls will point out that the post-earnings rally from Aug. 21 was a major gap-up and breakout move. That fact is certainly indisputable. But while in the immediate term some more upside is possible as follow-through and potential leftover short squeezes, many rational traders and investors will likely not look to chase this move higher for now.
More active investors and traders could look to short TGT stock around $103 or higher with a first downside target at $99. Any further bullish reversal upon some near-term consolidation would be used as a stop loss signal.
My clients and I prefer to structure a trade in the highest probability manner, which, in this case, means selling a very specific options spread in TGT stock.
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