Tuesday, April 24, 2012

M: Ambiguous trend shift

Macy's Inc. (M) has stores in 48 U.S. states and territories, selling under the names Macy's and Bloomingdale's.

Like all players in the highly competitive world of retail, the Cincinnati, Ohio company's success or failure is heavily dependent on the public mood. As dark as that mood has been over the past few years, surely it has nowhere to go but up.

M had the most bullish chart of 28 stocks added today to the Zacks top-buy list.

M's price began a steady stair-stepping upward from $23.75 in late August 2011. The uptrend peaked on April 5 at $41.27. Since then, the price has corrected down to as low as $38.26.

There are two voices that immediately sing out when a rising stock falters. "Exit now!", cries one. "Buying opportunity!", shouts the other.

Both opinions miss the point, of course. A fact-based trader will add a third voice calmly asking, "What's the trend?"

The answer, of course, is that the trend may have shifted, but it is rife with ambiguity.

Long- and mid-term, M most certainly is in a powerful uptrend, and has been since hitting a recession low in 2008.

From a narrower standpoint, M can be analyzed as standing on the edge of a downtrend. A two-day decline from the April peak brought the price down to $38.50, it then rose to $40.65 (a lower high) on April 17, and then moved down to $38.26 on Monday (a lower low).

A lower high and a lower low, by definition, constitutes a downtrend.

Yet, after hitting a lower low on Monday, the price retreated upward and closed above the the previous correction low, and today's trading keeps falling into, and then out of, a spinning top candlestick pattern, with the current price hovering near the open midway between the high and the low.

This means that there is no consensus among traders on the direction the price should take.

So when I make my trading decision at the end of this analysis, I'll need to reach an opinion on whether the pull up from the lower low and the subsequent hesitation negates the undoubted fact that M is in a near-term downtrend.

The rules are the rules when it comes to chart analysis, but rules are made to be broken.

Macy's has return on equity of 22% but with high long-term debt, amounting to 131% of equity. Like all major retailers, earnings are seasonal, coming in the Christmas shopping season. Macy's has shown higher 4th quarter profits over the year-ago quarter for two years running.

Institutions own 90% of the shares, yet the price remains low. It takes but 61 cents to control a dollar in sales.

The stock trades 5 million shares a day on average and supports a wide selection of options with narrow bid/ask spreads and high open interest -- an options traders dream come true.

Implied volatility stands at 32%, well above the six-month low of 26% in late March. It has declined from its recent high of 34%, on April 16.

Options trades are pricing in a 68.2% chance that the price will close between $35.02 and $42.16 a month from now, for a maximum 9.3% gain or loss.

Macy's next publishes earnings on May 9. The stock goes ex-dividend in June for a quarterly payout yielding 2.07% annualized.

Decision for my account: I want to see a breakout past the correction high before I'll consider opening a bull position on M. (See my discussion of the near-term trend, above.) So if the price pushes above $40.65 I'll conclude that the odds favor resumption of the uptrend. And a break above $41.27 will confirm that conclusion.


I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment