It is just 8 Weeks to December 25th! From ‘star-performers’ such as Abercrombie and Fitch (ANF) to ‘star-wannabes’ such as Hot Topic (HOTT), October has been simply awful for retail stocks. Does this mean we should avoid the retail sector completely?
Certainly not! But (Big But!) we should be careful about our choice of company. One interesting trading candidate is Abercrombie and Fitch. Abercrombie and Fitch is a star in the retail sector! ANF has historically been a winning 4th quarter play and, unlike so many other retailers, trades well above its 52 week low.
From a technical perspective, ANF bounced nicely off the $75 level and is seeking to reclaim its 20-day EMA. This is an important test because its 20-day EMA typically acts as support and resistance. Aggressive traders should keep a close eye on the stock price relative to this line to signal a potential bullish play. In conjunction with the EMA, the RSI is on the verge of crossing the 50 level, which is a further bullish sign. A potential strategy that may mitigate some of the risk is a May $80.00/$85.00 Bull Call and that would facilitate a lower risk trade than a more aggressive long call. The risk in a bull call spread is limited to the debit spent while the maximum profit potential is defined as the difference in strike prices ($5) – any debit spent.
Moving on to “Electronics King” Best Buy (BBY)… BBY bounced off its 50-day EMA last week. The stock seems destined to test the $50 level, which was resistance just 3 weeks ago and indeed in January and February of this year. A break above $50 resistance would be a strong bullish indicator. A similar strategy such as a March $50.00/$52.50 Bull Call could profit over time yet mitigates risk in the uncertain interim. The lengthy timeframe offers the trader opportunities to modify the trade in the event that the stock market takes a tumble at some stage. This holiday season should be driven by electronics and BBY is the Best at it!
Another interesting apparel stock is American Eagle Outfitters (AEO), which has a lower price point than ANF. AEO stores are also reasonably busy, which should cause them to do very well this holiday season. AEO just put in a double bottom at $22/share back in August and again last week. Today AEO gapped higher and just finished above its 20-day EMA. The next resistance level for AEO is likely going to be the $26 level, which held as resistance in August and September. AEO is a lower priced stock and could also be an interesting Married Put candidate. This would comprise a stock purchase combined with a May $22.50 Long Put for $2.45 (current ask). If AEO breaks the $26 area it can easily trend much, much higher, thereby offering an attractive risk/reward tradeoff.
Other beaten down Retailers that we could benefit from favorable Fed policy over the coming months are JC Penney (JCP) and Nordstrom’s (JWN). While most retailers have already made their 4th quarter runs by this time of year, recent downtrends might well offer a later entry point into the seasonal rally through to the famed Black Friday at the end of November. This is, of course, premised on favorable Fed policy. All bets are off if the Fed leaves the market to fend for itself. Given the uncertainty, spreads may be more appropriate than directional long call positions for aggressive traders while conservative traders might well prefer to hold off until after the Fed decision at 2.15PM Wednesday! Just as the market rallied in anticipation of the last cut, so it seems to be rallying again in anticipation of Wednesday’s announcement. Those that bet on a ‘sell on the news’ reaction last time were sorely disappointed and the comment we made before of it being a historically bad bet to bet against the market with the current Fed still stands!
Make it a profitable day!
