Caution Or Optimism? Rite Aid At 7-Year High

Mar.12.14 | About: Rite Aid (RAD)

Summary

RAD is at seven-year high in a positive environment.

Technical indicators point negatively to a pause or short-term fall.

This may provide an opportunity to trade these changes.

Short-term knowledgeable traders may use this to enhance their returns or reduce their risk.

In the current environment with an ageing population and favorable legislative changes, many health care stocks are highly regarded. With this expanding market their possibilities seem lucrative. This is especially so for drug retailers. Retail pharmacies' margins have been positively affected. More lower cost generic drugs have become available as more drug patents expire. Further, drugstores have been refining their profit models making their future even more promising.

In addition to these opportunities, Rite Aid (NYSE:RAD) has taken steps to improve is stores, its offerings and its agreements. It has clearly benefited from this focus. In the past year it has realized a significant rise in its stock price.

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The environment and fundamentals have not changed. The company's efforts have not diminished. What has changed is the stock price. As is seen above, we are no longer at the lows.

What are the cautions? First RAD has hit its seven years' high. Yet, it did not continue through this price with any vigor. The stock closed Friday March 7, 2014 at $6.56. This is more than 4% below its high of $6.87. RAD did not push through this high, but fell back. This may prove significant.

The trading volume for RAD was high and rising as the stock rose. This volume peaked on daily basis in mid September and on a monthly basis in October. Its volume has been declining since. This is especially so in the past three months. A declining volume with a rising price may imply less conviction by buyers to bid up the price. What seems to be an accelerating fall in volume may mean a coming fall in the price from this declining demand.

A number of indicators show RAD to be overbought in the near term. In mid February both daily RSI (example below) and Stochastic showed this condition. Yet, a stock that is overbought may continue to be so for a long time. MACD has turned negative. These are commonly used technical tools. They are just and only that - tools.

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Overview

Whether or not technical tools are prognostic either individually or collectively is greatly debated. How can they foretell the future?

It seems counter intuitive to sell a stock that is fundamentally of value since there has not been any substantive change; except its price, a positive. Yet, the technicals may reflect current fundamentals that we are unable to observe. If so, these other fundamentals may be factored into this price action and be a view that is apparent via the technicals. They may not foretell the future. They may, however, help measure where we are in the present relative to the past.

What does it mean? If we are to buy low and sell high, as the axiom goes, we are now not at the lows.

As a cautious investor, one may wish to hold RAD accepting the valleys that occur along the way. One may also consider selling at this high point to buy the stock on price pull backs. In so doing one acknowledges the opportunity that may be lost in not holding it continuously.

If you understand what you are doing, option strategies may be used to improve outcomes or reduce risk (e.g. selling covered calls).

We may not be at top but are at some considerable height. Acknowledging this, I am long RAD, trading RAD with an upward bias in the long term and downward in the short term.

Disclosure: I am long RAD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is written for information purposes only. It is not intended as a recommendation to buy or sell any security. Seek your own qualified sources for such recommendations.