The most recent data on retail sales for August disappointed the market and many are once again concerned about the health of the consumer as we head into the end of the year. The pessimism started to rise during the summer, and as some of the retail giants were reporting earnings in August, I wondered Will Retail Data Rock the Market?.
At the start of the week, the markets were on edge in anticipation of the FOMC meeting, as well as the upcoming budget battles in Washington. The FOMC surprised the experts and most investors on Wednesday by not changing policy and stocks soared in reaction to the news.
The graphic shows that total retail sales in August were up just 0.2% but excluding autos only rose 0.1%. This data on September 13 was followed by the final August reading on consumer sentiment from the University of Michigan.
The sentiment came in at 76.8, which was the lowest reading in the past five months. The chart shows that the short-term uptrend is still being maintained. Using technical analysis to analyze fundamental data from a technical perspective can be an early way to spot changes in economic trends as I discussed in a prior trading lesson.
Still, the trend in retail sales as well as consumer sentiment is still positive, and before the end of the month, we will also get the Conference Board's reading on consumer confidence. The next Retail Sales report is due on October 11.
Many of the retail stocks have a strong pattern of bottoming in the late summer or early fall and rallying until Christmas. This chart of the retailing stocks shows that it typically bottoms around October 12 (line 1) and then rallies until the end of the year. The downtrend in the seasonal trend, line a, is typically broken in early November.
There is often a period of softness at the start of the new year, which is followed by another surge as the retail stocks typically peak on April 26, line 2. Of course, one should not act on the seasonal trends until the key technical studies confirm the seasonal trends.
This seasonal tendency has provided many good opportunities in past years. The overall negative sentiment on many of the department stores and other retailers suggests these are stocks to be watched in the coming weeks.
The DJ General Retail Index tested the weekly starc+ band in early July as it reached 610. It made a marginal new high in August at 614. The recent low was 576, which represented a 6.2% correction from the highs. At the end of August, the index closed below its 20-week EMA for one week and tested the uptrend, line a. The Index has since bounced nicely from this support. The next upside targets are in the 640 area.
The weekly relative performance did confirm the highs this summer, line b, and is still below its WMA. The daily RS line (not shown) is very close to moving back above its WMA.
The weekly on-balance volume (OBV) did not confirm the most recent highs, line c, but has held above the long-term support (line d) on the recent correction. The OBV closed back above its WMA last week and could break out ahead of prices. The daily OBV (not shown) has already broken out to the upside and is well above the July highs.
On August 5, XRT made a high of $83.24 and formed a daily doji. A daily LCD was triggered the following day. On August 27, XRT made a low of $77.24, and then the week ending September 6, it formed a weekly doji.
The next week's close was above the doji high thereby triggering a high close doji buy signal. The close on Tuesday at $81.76 was above the 61.8% Fibonacci resistance confirming that the correction was over. The weekly starc+ band is now at $84.20 with the monthly projected pivot resistance at $85.45. The weekly trend line resistance, line e, is now in the $86.30 area.
The weekly relative performance did confirm the August highs and closed last week just slightly above its still rising WMA. The RS line has long-term support at the uptrend from the 2011 lows, line f.
The weekly OBV broke through the long-term resistance at line g in August and has just pulled back to its WMA. It has now turned up, and with a strong close this week, should confirm a solid new uptrend. There is initial support now at $80-$80.20 with the monthly pivot at $79.45.
Macy's Inc. (M) has been a strong stock in this bull market, up 780% from the late 2008 low of $5.07. The weekly chart shows that it has tested the 50% Fibonacci retracement support at $43.52 over the past month. This was calculated from the early 2011 lows. The 61.8% support is at $41.61 with the uptrend from 2012, line a, at $41.40.
The weekly relative performance made a slight new high with prices in July then dropped below its WMA on July 19. The uptrend, line b, was broken the following week, and it is still well below its declining WMA. The RS line has long-term support at line c.
The weekly OBV also made a new high during the summer and dropped below its WMA five weeks ago. The OBV is now very close to long-term support at line d. It needs to turn higher and close above its WMA to complete its bottom formation.
The daily chart shows a potential double bottom formation, line f. There is key resistance on the daily chart at $46.34, line e, with the quarterly pivot at $46.67. A close above these levels would be a sign that a bottom was in place. The 61.8% retracement resistance is at $47.91.
The daily relative performance broke its uptrend, line g, in July and is now in a well-established downtrend (line h). The RS line is acting weaker than prices and shows no clear signs yet of a bottom. The daily OBV is now testing its WMA, which is still declining. The OBV needs a few consecutive higher closes on good volume to form a bottom.
Another department store I like is Kohl's Corporation (KSS) as the weekly chart shows major resistance in the $54-$54.50, line a. The quarterly R1 resistance is at $54.74 while the weekly starc+ band is at $56.05. The width of the long-term trading range has major upside targets in the $65-$67 area.
The stock has been trading in a tight range for the past three weeks and has been holding above the 20-week EMA at $51.30. The weekly uptrend is now at $50.50 and the quarterly pivot is at $50.04. In August, the spike low was $49.57, so the stop needs to be under this level. The monthly projected support stands at $49.08.
The weekly relative performance shows a long-term downtrend, line c, with the RS line below its WMA. A move in the RS line above the June-July highs would be the first sign that it is becoming a market leading sector. The daily RS analysis (not shown) is still negative.
The weekly OBV broke the downtrend from the April 2012 highs, line d, in June of 2013. The OBV shows a solid uptrend and its WMA is rising sharply. The OBV is well above its uptrend, line e.
Conclusion: Before the opening on September 19, I tweeted a recommendation to buy Kohl's Corporation (KSS), 50% at $52.37 or better and 50% long at $51.81, with a stop at $48.77 (risk of approx. 6.3%).
Cabela's Incorporated (CAB) is a $4.66 billion sporting goods company that has been range bound since last May. It is trying to close the week above its 20-week EMA at $65.28. There is major weekly resistance now at $71.80-$72.54, line a.
The monthly pivot is at $67.46 with the projected monthly resistance at $69.87. A completion of the trading range, lines a and b, projects a move to the $82 area. There is initial support now at $65 with the monthly projected low at $63.13. The support in the $61.50-$62.20 area is now quite important.
The weekly relative performance has formed lower highs and is now testing stronger support at line d. The RS line is now below its slightly declining WMA. The weekly OBV formed lower highs in both May and August as it is now back to long-term support at line f.
The OBV needs to move back above its WMA and then the major downtrend, line e, to indicate that the uptrend has resumed. The daily OBV (not shown) is still negative, so a drop back to the September lows is possible.
Conclusion: I recommend going 50% long Cabela's Incorporated (CAB) at $63.36 and 50% long at $61.92, with a stop at $58.91 (risk of approx. 6.3%).
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Mattel, Inc. (MAT) is a $14.8 billion dollar toy and game company that has had a rough past four months after peaking at $48.48 in the middle of May. It dropped to a low of $40.04 at the end of August. This was a correction of 17.4% as the stock is holding between the 38.2% and 50% Fibonacci retracement support, which is often a good entry level.
MAT has rallied 7.3% from the lows and is approaching the resistance at $43 to $43.28, which is the 38.2% Fibonacci retracement resistance level. The 50% resistance is at $44.27 with the quarterly pivot resistance at $45.35. The downtrend, line a, is in the $46.40 area.
The relative performance plunged in the middle of July in response to the latest earnings as sales increased but profits fell. GAAP earnings per share dropped significantly. The RS line is now trying to bottom out, line b. The RS line needs to move above the August highs to complete a bottom.
The on-balance volume (OBV) formed higher lows over the past two months, line c, while prices were making lower lows. The OBV moved back above its WMA on September 3 confirming the positive divergence and suggesting that the worst of the selling could be over. The weekly OBV (not shown) is above its WMA and therefore positive.
Conclusion: I recommend going 50% long Mattel, Inc. (MAT) at $42.76 and 50% long at $41.42, with a stop at $39.83 (risk of approx. 5.4%).
Wednesday's powerful post-FOMC rally pushed the Spyder Trust (SPY) to a 5.7% gain for the month so the overall market is overextended. Many of the retail stocks are still closer to the year's lows than the year's highs and the market's burst of upside momentum has reduced the selling pressure in the retail stocks
Therefore, I suggest that if you are not doing so already, you start to monitor the retail stocks. The retail apparel stores, department stores, home improvement retailers, as well as the specialty retailers are the main categories that I follow. Keep an eye out for high volume in these stocks as it can often signal an important turning point.
Don't forget to read Tom's review of the week's action "The Week Ahead: How Long will the Fed High Last?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.