Not all dips are created equal. Some are born of distribution and mass liquidation, while others arise from garden variety profit-taking. The former kills trends and shatters support. The latter provides an attractive entry point for spectators looking to ride the trend. Therefore, in this article, we’re focusing on three retail stocks to buy that are following the second path.
Sellers ran the tables for the third day in a row on Tuesday. The S&P 500 ended at the lows of the day, but it was the tech-heavy Nasdaq Composite that stole the show — falling nearly 5%.
So, if you’re searching for a silver lining to the thrashing, it’s that we now have bull retracement patterns galore. And I’m finding some of the more attractive setups among retail stocks.
That said, here are three of my favorite in the industry:
Let’s take a closer look at how they’ve fared during the meltdown, and suggest which options strategies are best to deploy right now.
Retail Stocks to Buy on the Dip: Target (TGT)
Like many consumer stocks, Target blew the doors off its earnings numbers last month. In turn, Wall Street rewarded the retailer with a massive price hike to record highs. And in the three weeks since, a quality pullback has formed — returning TGT stock to its rising 20-day moving average and then some.
While a gap fill could be in the cards, I think we’ve already retraced enough to consider buying the dip. We first need to break the series of lower pivot highs, but I like triggering bullish trades when it happens.
Although the implied volatility isn’t as high as I’d like, we can still grab enough premium in the out-of-the-money puts to make bull put spreads work.
The Trade: Sell the Oct. $130/$125 bull put for around 50 cents.
Consider it a bet that TGT stock stays above $130 for the next month.
Walmart fell another 3% Tuesday, bringing it within a stone’s throw of its rising 20-day moving average. Given the fresh momentum behind its uptrend, I can’t help but view this as one of the best retail stocks to buy. The heavy volume accompanying its last advance suggests institutions are supporting the trend. By comparison, participation during the last four down days has been average.
In addition to the 20-day moving average, there are also multiple old resistance levels coming into play in the $135 to $137 zone. In the principle of polarity holds, these ceilings should become new floors.
It’s important to watch for a reversal candle to form. With WMT stock closing at the low of the session on Tuesday, we’ve yet to see signs of buyers emerging. Confirmation is needed before pulling the trigger. Watch for a break of a previous day’s high or at least a push above intraday resistance to signal bulls are returning.
On the option pricing front, implied volatility is moderately high at the 40th percentile. That makes bull puts an appropriate play.
The Trade: Sell the Oct. $125/$120 bull put for 75 cents.
If WMT holds above $125, you’ll capture the max gain of 75 cents.
Retail Stocks to Buy on the Dip: Nike (NKE)
Nike rounds out our hat trick of retail stocks to buy. Optimism ahead of the Sept. 22 earnings report has held NKE stock aloft during the past few days of turmoil. With Tuesday’s rally off the lows, the retail giant is now only 4% off its highs. It’s faring much better than most other stocks right now.
Investors have seen sharp gains out of other retailers following their earnings report (see Target above), and I suspect they’re holding out for good numbers from Nike. The lack of volume during the past two down days shows sellers lack conviction. They’re phoning it in, and I think it will make the coming rebound in NKE stock all the easier.
Implied volatility sits as the 29th percentile. I’m hesitant to suggest an overly aggressive trade into their announcement. Bull puts are my preferred route to play.
The Trade: Sell the Oct. $100/$95 bull put spread at 75 cents.
On the date of publication, Tyler Craig held a long position in WMT.
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