Gap Is Too Cheap to Ignore - How to Trade the Retailer

Bloomberg

Gap (GPS - Get Report) offers apparel and accessories for all members of the family under the store brands that include Old Navy, Gap and Banana Republic. The retailer reported earnings after the closing bell on Thursday and beat on earnings per share but missed on sales. The stock opened below its monthly pivot at $18.16 without a nearby value level. Shares of Gap are fundamentally "too cheap to ignore" with a P/E ratio of 6.77 and dividend yield of 5.95%, according to Macrotrends.

Gap closed Thursday at $17.75 down 31.1% year to date and in bear market territory 43.5% below is 2019 high of $31.39 set on March 1. The stock is trying to recover with a gain of 16.6% above its Aug. 15 low of $15.22. The biggest disappointment was that same-store sales from Old Navy declined by 5%. This is the brand Gap depends upon for future sales growth.

The Daily Chart for The Gap

Courtesy of Refinitiv XENITH

The daily chart for Gap shows that the stock has been below a "death cross" since Aug. 20, 2018, when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices lie ahead. The stock has been sensitive to earnings volatility as it spiked higher on March 1 following its earnings beat on Feb. 28. The stock is well below its annual risky level at $36.42. The stock is also below its quarterly risky level at $32.21. Below the market is its semiannual value level at $10.39. The monthly pivot for August at $18.16 expires on Aug. 30.

The Weekly Chart for The Gap

Courtesy of Refinitiv XENITH

The weekly chart for Gap is negative but oversold with the stock below its five-week modified moving average of $18.06 and well below its 200-week simple moving average or "reversion to the mean" at $25.89. Note how the stock had been declining along its "reversion to the mean" between the weeks of Dec. 1, 2017 and May 1, 2019. The 12x3x3 weekly slow stochastic reading is projected to end the week at 17.40 up from 15.51 on Aug. 16. The stock would need a weekly close above $18.06 with the stochastic reading rising above 20.00 to become positive.

Trading Strategy: Buy weakness to the semiannual value level at $10.39 and reduce holdings on strength to the 200-day simple moving average at $23.27.

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How to use my value levels and risky levels:

Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, the latest on July 31. The quarterly level was changed at the end of June. My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.