Footwear retailer Foot Locker (FL) is scheduled to report quarterly earnings before the opening bell on Friday with the stock stabilizing above its semiannual pivot at $38.92 where the stock should be bought on weakness. A positive reaction to earnings that results in a weekly close above its five-week modified moving average at $41.69 will upgrade the weekly chart to positive. Another reason for optimism is that the stock is fundamentally cheap with a P/E ratio of 8.26 and a dividend yield of 3.84%, according to Macrotrends.
Foot Locker closed Wednesday at $39.76, down 25.3% year to date and in bear market territory 41.5% below its 2019 high of $68 set on March 1. The stock set its 2019 low of $36.82 on Aug. 15, and is up 8% since then. The stock is consolidating a longer-term bear market decline of 64% from its all-time high of $79.43 set during the week of Dec. 9, 2016, to its five-year low of $28.42 set during the week of Nov. 10, 2017.
Analysts expect Foot Locker to earn 66 cents a share in the quarter. The retailer missed earnings estimates for its prior quarter reported on May 24 and the stock had a huge downside price gap. This gap ended a six consecutive winning streak in terms of beating earnings-per-share estimates. Following the May 24 earnings report, the retailer lowered its 2019 guidance on stalling sales and reduced profit due to higher tariffs on Chinese imports.
The question now is whether or not these pressures have been resolved? The retailer has been spending on e-commerce sales but in my judgment when it comes to athletic shoes, I want to try them on at the store. That will be harder to do as 165 store closures are planned in 2019. Piper Jaffray warns that Nike (NKE) will continue to hurt sales at Foot Locker.
The Daily Chart for Foot Locker
Courtesy of Refinitiv XENITH
Foot Locker has had a volatile ride so far in 2019. The retailer had a positive reaction to earnings on March 1, and set its 2019 intraday high of $68. Investors sold the stock on this strength. Then came the price gap lower on May 24 on the earnings miss. The annual risky level is above the chart at $78.79. The stock closed at $41.92 on June 28, which was an important input to my proprietary analytics. This resulted in a semiannual pivot at $38.92 and a quarterly risky level at $46.03. The close of $41.06 on July 31 was an input that resulted in a risky level for August at $43.56.
The Weekly Chart for Foot Locker
Courtesy of Refinitiv XENITH
The weekly chart for Foot Locker is neutral with the stock below its five-week modified moving average at $41.81 and well below its 200-week simple moving average or "reversion to the mean" at $55.40. Note that the stock set its all-time intraday high of $79.43 during the week of Dec. 9, 2016 then traded as low as $28.42 during the week of Nov. 10, 2017. This bear market decline of 64% is being consolidated. The 12x3x3 weekly slow stochastic reading is projected to rise to 22.14 this week up from 14.90 on Aug. 16. Therefore, a weekly close above $41.81 will result in a positive weekly chart.
Trading Strategy: Buy weakness to its semiannual value level at $38.92 and reduce holdings on strength to the quarterly risky level at $46.03. I will not focus on the monthly level at $43.56 as it expires on Aug. 30.
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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.