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Kohl’s Beat on Earnings - Weakness Tests a Key Value Level

Buying Kohl's on weakness to its weekly value level at $38.08 and reduce holdings on strength to its monthly risky level at $46.02.

Kohl’s  (KSS) - Get Report on Tuesday reported better-than-expected Q4 earnings. The retailer's stock initially traded up as much as 4.3% to $40.10, then faded to its weekly value level at $38.08. 

My call is to buy on weakness to the weekly value level at $38.08 and reduce holdings on strength to its monthly risky level at $46.02.

The Menomonee, Wis., chain offers brand-name apparel, shoes, accessories and home and beauty products at affordable prices. 

Kohl's has benefited from its relationship with  (AMZN) - Get Report as consumers who buy online via the Seattle e-commerce giant can drop off returns at Kohl’s stores.

At $38.85 the stock is down 24% year to date and in bear-market territory 53% below its Nov. 12, 2018, high of $83.28. 

Kohl’s had a bull-market run of 145% from its November 2016 low of $33.87 to this high.

The stock is fundamentally cheap with a p/e multiple of 7.6, according to Macrotrends. The retailer declared a $0.704-a-share quarterly dividend for a dividend yield of 7.3%.

The Daily Chart for Kohl’s

Daily Chart For Kohl's

Daily Chart For Kohl's

Courtesy of Refinitiv XENITH

The daily chart for Kohl’s shows the stock has been below a death cross since Dec. 24, when the 50-day simple moving average fell below the 200-day simple moving average. Such a move indicates that lower prices would follow. 

When this occurs, the trading strategy is to sell strength to the 200-day SMA, and the chart clearly shows several opportunities to sell at $70 and above between Jan. 9, 2019, and May 1, 2019.

The close of $50.95 on Dec. 31 was the major input to my proprietary analytics. Its semiannual, annual and quarterly risky levels are $56.57, $57.37 and $67.37, respectively.

The close of $39.15 on Feb. 28 was an input to my analytics. Its weekly value level is $38.08 with its monthly risky level at $46.02.

The Weekly Chart for Kohl’s

Weekly Chart For Kohl's

Weekly Chart For Kohl's

Courtesy of Refinitiv XENITH

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The weekly chart for Kohl’s is negative but oversold, with the stock below its five-week modified moving average at $43.24. 

The stock is also below its 200-week simple moving average, or reversion to the mean, at $53.14. 

The 12x3x3 weekly slow stochastic reading is 15.8, which is below the oversold threshold of 20 on a scale of 00.00 to 100.00.

Trading Strategy: Buy weakness to its weekly value level at $38.08 and reduce holdings on strength to its monthly risky level at $46.02.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the Feb. 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

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.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

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