Why You Should Buy Macy's Stock Now and Sell Wayfair Shares
Comprehensive, cool-headed technical analysis shows that often the best time to buy a stock is when the crowd is beating up on it and the best time to sell is when there's lots of enthusiasm. This is exactly the case right now with two retail stocks: Macy's (M) - Get Report and Wayfair (W) - Get Report .
This is because a stock's price often trends lower or higher before some fundamental news emerges to justify that trend. By the time the headlines come out, the trend is often over. If you pay attention to the stock's price and other technical signals -- and ignore the news -- you can amass big profits.
Look at Macy's. The stock slumped Wednesday after the department store company reported weaker-than-expected quarterly results and warned about full-year earnings. But this followed a slide in the stock that lasted about four months and took it to about $47 by Tuesday from $73 in mid-July. As happens so often, the "news" emerged to justify what the stock's price was already showing.
The decision support engine, which analyzes multiple technical variables and identifies historical patterns, tells us when a stock's trend is about to reverse. The following monthly chart shows the warning sign near the July peak that told us the stock was about to sell off. The bold blue lines in the top and bottom panes show what we call a bearish divergence sell signal. This occurs when higher highs in price are accompanied by lower highs in stochastics, telling us that the power behind the buying is waning and is about to transform into selling power. Four months later, with the stock having lost about 45% of its value from that high, the headlines have emerged to confirm that signal.
Now, however, the opposite condition is forming.
Click here to see the following chart in a new window
Stochastics are at oversold extremes, the stock's price is below the lower two-standard-deviation band and sentiment is demonstrably bearish. (Not shown here, the stock's price on the daily bar chart is below the three-standard-deviation band and the Bollinger band.) Hence, the decision support engine is issuing an alert to cease selling actions in Macy's into the $42 +/-$1 area and begin buying actions into the $38 +/-$4 area. (If you have a short position, you can use these parameters to either cover your position or set up protective buy stops.)
Why? As the blue arrow indicates, the next move of consequence is for a test of at least $52, with $58 possible, in the coming 12-18 months. Therefore, if you're short, protect yourself and/or exit with profits, and if you're flat or already long, use these parameters to establish, maintain or add exposure for a coming multimonth bounce. While a test of $33 +/-$3 can't be ruled out yet, it would only add to the slingshot effect that awaits these shares once the final low is in place, if it is not being formed in this $40 zone.
We can see that Wayfair exhibits the opposite conditions. We've zoomed in on its chart, using daily bars, as the pattern is really ripe for action.
Click here to see the following chart in a new window
Notice the spike to the August high that pushed beyond the upper four-standard-deviation band (containing 99.9% of normality). As we always warn, prices can't live at this statistical anomaly for more than hours/days, and before the day in August ended, the price began declining to the September low, where the 200-day moving average (blue line) satisfied the herd's return to neutrality (emotional, anyway). The bounce from the low $30s has brought prices back to the upper two-standard-deviation band, a far cry from the four-standard-deviation band in August, while the conditions formed a bearish divergence sell signal (higher price highs throughout October with lower stochastics highs).
In other words, the crowd's behavior is telling observers that it's still exhausted from the spike to the manic four-standard-deviation band extreme, and sellers are now just trying to minimize their losses from the late-joining buying actions they made when the mania was in full bloom and prices were dragging them into long exposure with the late July price gaps higher. Next, the September lows should be broken, and the lower green box, containing the lower two-standard-deviation band, as well as the lows from the decline into January, should be explored in the coming five to 13 months. That creates a potential for a 50% decline. Therefore, if you're long, the decision support engine warns you to place sell stops at $38, while hoping for a quick bounce to $43 allows you out at higher prices. These two levels are perfect for establishing short exposure, if you're currently flat, as well as adding shorts if you are already short.
For more of this kind of analysis, join our new real-time, live-market analysis chat room. Come benefit from decision support engine analysis from bell to bell, addressing indices and stocks, as well as member questions throughout the day. Special founding member pricing is available for TheStreet.com readers who subscribe early, after enjoying a complimentary trial week.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.