You didn’t expect retail to go to zero, did you? Here’s your oversold bounce trade on L Brands (LB) and a few other retail stocks. (May 20, 2016)
LB FINL TGT XRT LB
I want to look at L Brands ( NYSE:LB ). This is one of those that you almost want to say, “You really didn’t think it would go down forever, did you?” It looks like it was going to, really kind of a nasty pattern here. And then once the stock broke down it just, frankly, it keeps going and looks like it’s going to zero. That doesn’t happen. When you look at a stock like this that’s declining, and you’re kind of looking for the turn. Focus on volume, and the direction of price here, all these red boxes, the solid red boxes. That’s known as a bad thing. And it keeps going down. So you’ve got all these folks who are trying to pick the bottom, trying to get it right at the bottom here. Everybody tries that and everybody does it once. The rest of the time you’re just buying something on the way down.
So you’re buying here, volume is picking up a little bit and then, Boom! You kind of get crushed. I forget where the rest of the chart goes, but I don’t even think this was EARNINGS yet. They just came out with a pre-earnings number and people got freaked out. Okay, this is an earnings thing. Now you’re looking at this and you see a sell-off to $60.00. I would have felt better about it if it closed near to the top of the range. Because it told me buyers were coming in at the end of the day. Where as they actually really weren’t, because the stock closed near the low. But now we look at this, and I think it’s pretty safe to declare that $60.00 is a low, because it had to end sometime. This was a lot of selling, 25 percent decline from top to bottom just on this last little resistance level here, 25 percent. So now we get a snapback rally.
You look at the weekly chart, you see again, this looks ugly. But from where this is now, and you have to do this when you’re looking at charts; from where it is right now, what do you think is the most likely scenario? This, like just a continued decline? Remember, it’s not like they’re in the biotech space and their patent just got invalidated on the one single drug that they had. They’re in the apparel business, they’ve got a lot of stuff. So do you think this is more probable? Or maybe this? Now, what it does after that, who knows? Maybe they go into the biotech space. Maybe it continues up. Maybe it doesn’t. Maybe it rolls over. But what I’m saying is, from here, from right now, where do you think is the most likely direction? I think it’s higher. And the cool thing is, I can take a trade like this and I don’t have to risk a lot of money. Because how do I know for sure that I’m wrong? When the stock pulls back $63.55. In other words, when it falls below $60.00 then I have to look at it and say, “Well, there I go, doing my proctology thing again; trying to pick a bottom. That didn’t work too well.
So you can look at this and take this opportunity to buy this, FOR A TRADE. Maybe look for 5 or $6.00 out of it even. Because there’s other stuff like Finish Line ( NASDAQ:FINL ) that’s giving you the same type thing. Or look at Target ( NYSE:TGT ); it did that this week. So the retail stuff has bottomed out, at least short-term. Long-term, who the heck knows? But for short-term, for this ( NYSEARCA:XRT ) for example, I think $40.00 is a pretty safe, reliable bottom. At LEAST for an oversold bounce. Stop just a little below 40.00. L Brands ( NYSE:LB ), stop a little below 60.00. And then you take these oversold bounces, and don’t look for a lot from them, because the trend is still down. There is still a lot of resistance from overhead supply, people that wish the heck they hadn’t bought here. So don’t expect too much from them, but take what you can get with a well defined risk.
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