Six out of every 10 breakouts to the upside by KSS over the past four years has resulted in a profitable trade. The average gain has been 5.5% that, combined with the 58.,8% success rate, gives KSS as adjusted yield of 4.4%, a bit below the 5% that is the minimum I prefer to see.
The KSS chart has looked like a smoking ruin since Nov. 29, when a company sales report was followed by a 10.1% downside gap that carried the price from a prior-day close of $51.15 to a post-gap open of $46.
Gaps produce great resistance. They unexpectedly put traders in a losing position, and for many a rise is less a motive to trader and more a reason to close positions to mitigate the loss. I think it will take a lot of work for KSS to move significantly above the $46 level.
The upper price-channel boundary that produced Thursday's bull signal had dipped to a lower level two days earlier and so is poorly correlated with recent resistance levels. A more highly correlated breakout level is $45.21 and the prudent trader would wait for a break above that price before opening a trade.
It's not an awful chart by any means, but I see aspects of it that call for caution.
On the weekly chart KSS has been zig-zagging in a massive slightly declining sideways move since October 2009 and hit the lower boundary of $41.35 on Jan. 3. Thursday's breakout is part of the retracement of that decline.
The prior swing high was $55.25, and I would want to see that exceeded before I even considered the theory that KSS might be in an uptrend. But no matter. The sidewinding channel is wide enough to produce plenty of profit.
Kohl's, headquartered in Menomonee Falls, Wisconsin, is a household name in suburbs across America. It operates 1,127 stores in 49 states that sell clothing, bedding and other soft products, with prices falling in between the high-end department stores and the discounters.
The business is producing a quite respectable return on equity of 17% but at the cost of debt amounting to 73% of equity, which is much higher than I like to see.
Like all U.S. retailers, sales peak in the 4th quarter. The 2011 Christmas season earnings were slightly higher than those of a year earlier. The 2012 4th quarter results have yet to be published.
Institutions own 90% of shares and the stock price is cheap. It takes only 54 cents in shares to control a dollar in sales.
KSS on average trades 2.9 million shares a day and supports a fine selection of option strike prices with open interest mainly in the three- and four-figures in the front month. The front-month at-the-money bid/ask spread on calls is 5.9%, which is fairly narrow.
Implied volatility stands at 22%, the bottom of the six-month range. Implied volatility that low makes it difficult to create option spreads with enough yield to make the effort worthwhile.
A February bull put spread, short the $44 put and long the $40, yields only about 10% and has quite a large risk/reward ratio.
Options are pricing in confidence that 68.2% of trades will fall between $42.11 and $47.93 over the next month for a potential gain or loss of 6.5%, and between $43.62 and $46.42 over the next week.
Options trading is slow, with calls at 77% of the five-day average volume and pouts at a mere 30% of average volume.
The fair-price zone on today's 30-minute chart runs from $44.88 to $45.08, encompassing 68.2% of transactions surrounding the most-traded price, $44.96. With four hours to go before the close, KSS is trading at about the most-traded price and has moved very little for the past two hours.
Kohl's next publishes earnings on Feb. 28. The stock goes ex-dividend sometime in March for a quarterly payout yielding 2.84% annualized at today's prices.
Decision for my account: I'm passing on Kohl's, in part because of the cautions I saw on the chart, and mainly because of the volatility is so low. Volatility is the mother of profit, and when Mom has gone missing from a stock, I tend to stay away, too.
My trading rules can be read here. A discussion of recent modifications to my trading methods, which haven't yet been incorporated in the original write-up, can be found here.
And the classic Turtle Trading rules on which my rules are based can be read here.
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.