Retail stocks suffered big losses at the hands of Amazon (NASDAQ:AMZN) as it completely disrupted how they did business. It took them ten years to come to terms with it — with heavy casualties. While there are many retail stocks still reeling from the shift into e-tail, there are winners that have found ways to adapt. Target (NYSE:TGT), Best Buy (NYSE:BBY), and the SPDR S&P Retail ETF (NYSEARCA:XRT) are three equities that have done well. But today we are not going to celebrate their success but instead look for the potential pitfalls that lie in their charts.
Stocks that rally hard usually make for a better short-term bearish trade than long-term investment once they’re at peaks. So before you hate me for calling for lower prices in the stocks, consider the fact that this write up is simply a cautionary tale on where the stock prices are for TGT, BBY, and XRT — not their businesses. For the most part, the management teams are doing a great job thriving in a difficult environment.
Luckily the opportunity for retailers remains great. The sector has the advantage of a strong consumer especially in the United States. This gives stores like Target and Best Buy a good base on which they can build. In other words, they don’t have to fight the tide; they only need to make sure they maximize their profits from it. And this is likely to continue for as long as central banks are inflating the globe. The bullish thesis for retail stocks — especially in the U.S. — is alive and well.
Nevertheless, these three retail stock charts look extended and they could be headed for short term disappointments.
Target (TGT)
While the XRT stock is mired almost flat for the year, there’s no doubt that TGT stock has been outperforming the sector. It is up 62% year-to-date and the closest competitors to it are Costco (NASDAQ:COST), BBY, Walmart (NYSE:WMT) at 41%, 30% and 28% respectively. So why do I want a short it? The answer to this lies in the target’s stock chart itself.
TGT just rallied almost 30% off a strong earnings report. While this proves that management is executing well on plans especially online, it cannot defy the laws of gravity. Stocks don’t usually go up forever in a straight line. Buyers and Sellers need to consolidate to establish a better base. Otherwise TGT stock chart will be riddled with pitfalls from weak hands. As it is, there is an $11 open gap just below current price. If TGT falls below $104 per share it is vulnerable to accelerate to try and fill the gap. Conversely, if the bulls can set a new high they could extend the rally towards $120 per share.
Nevertheless, while markets in general are still nervous about geopolitical risk I find it too risky to go long TGT stock at this altitude. While shorting stocks this strong outright exposes me to unlimited losses, it is reasonable to use the options market and short it via put spreads if TGT triggers below $104 per share.
It is important to note that if there is no trigger then there is no trade and that remains true for either cases. Moreover, if I short the stock I must change my mind at the new high. Conversely if I’m long TGT stock for a trade rather than a long-term investment, then I stop myself out below $104 per share. This is a tight range for TGT. And at this altitude it’s too vulnerable to dips so the downside stop for bulls is very important. Because from here is not likely to crash up.
Best Buy (BBY)
While I like the fundamentals behind target, I am not as big a fan of Best Buy. They are the only game in town and yet they still struggle every quarter to convince Wall Street that they deserve the love. So it is not a surprise to see that unlike TGT, BBY stock is 20% off its highs. Furthermore it recently lost a pivot point around $69 per share. So now this becomes resistance until the bulls can prove that they can reclaim it. Until then the downside scenario is easier than rallies.
To make matters worse, BBY must hold above $61.50 per share else it risks falling another $8 from there. While this is not a guaranteed forecast, it is a likely scenario that exists today. Onus is on the bulls to overcome this overhead resistance and it won’t be easy, because this has been a pivot point since 2017. Meaning both bulls and bears will fight it out hard thereby creating congestion.
The good news for BBY stock is that it has been setting higher lows off of the 2018 Christmas correction bottom. So if I short the stock here I have to be honest with my stop loss which will come if it can convincingly break above $71.00 per share. On shorter time frames, if above $70 BBY targets $74. Conversely, if it falls below $66 per share it can lose another $4 quickly and come too close to another crucial must-hold level.
SPDR S&P Retail ETF (XRT)
If TGT and BBY are two retail champs are vulnerable to dips here, then shorting the XRT also makes sense. Its short-term chart resembles that of BBY. So it too has a tight range with potential catalysts for bulls and bears. Unfortunately, XRT stock is closer to a breakdown line than a breakout potential neckline. If it falls below $41.50 per share it would invite momentum sellers and risk losing another $3 from there.
The opportunity to short it comes with the responsibility to use tight stops because just above $43 then $44 per share there will be buyers. XRT could rally $4 from there even in the face of strong resistance. This is a finite opportunity because the long-term range shows tremendous support near $38 per share for almost six years. Unless markets in general collapse, buyers will defend it there.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
