The Technical View: Time to go Shopping

The Christmas spirit is over and yet consumers have another reason to shop till they drop. Apart from unemployment improving which brings income to households, the persistent fall in oil prices gives an extra boost to consumers’ disposable income. According to a recent report by Morgan Stanley “a 15 percent move in gasoline prices is worth $60 billion at an annual rate in consumer spending power, which is nearly 0.5 percent of disposable personal income”.

Our chart below shows the effect that energy prices can have on retail sales.

Retail stocks as measured by the XRT Exchange Traded Fund (ETF) had a difficult year in 2014 trading sideways for the most part. However, the recent price action of the sector suggests a promising year ahead if all things remain equal. In early December price action finally moved the sector above its trading range and the prior resistance area became support. Another positive is the bullish flag continuation pattern completed to the upside. Bullish flags are a pause in the trend where the price becomes confined in a small price range of two parallels. An important point here is volume, which has to increase at break point – something that has been observed in our pattern below.

The sector also started to look interesting relative to the broader market (S&P 500). In our next chart below we use a Relative Strength (RS) analysis where we compare the sector vs the S&P 500.  A rising RS Line indicates that retail stocks are outperforming (up more, down less) than the S&P 500 and the opposite when the RS Line is downward sloping. Retail stocks have taken a U-turn from being under-performers to out-performers. Momentum as measured by MACD has also picked up and crossed above the zero line, indicating bullish momentum in relative terms.

With regards to individual stocks, the sector offers investors many choices. From general retailers to home improvement stores and apparel all can benefit from consumer euphoria.

To give an example, Wal-Mart the king of retailers offers a nice illustration of a bullish chart. Similar to the retail sector, Wal-Mart’s price action indicates a continuation in trend due to a break above the long term trading range and above the flag. One can also observe that volume expands at each break point.

Our second example is Rite Aid and though it is not directly associated to grocery or apparel goods, it is included in the retail sector as a food and drug retail store. Benefitting from stronger flu-relief sales, the retailer shows a very promising reversal chart. An “Island Reversal Bottom” – a reversal pattern which starts with a gap down, trading sideways and then breaks above with a gap up at high volume – provides optimism for the stock.

The Christmas spirit is here to stay for a while as euphoric consumer spending is helped by lower oil prices, low interest rates and better unemployment numbers. Consumer confidence has also improved and all these can be a catalyst for retail stocks to do well.

Costas Pierides CFTe MSTA

Market Technician

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