Stitch Fix Has a Surprising Trade for Gutsy Investors

For most, Stitch Fix is simply too risky a trade in this environment. But at least the lows are holding for the stock - for now.
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Even though the broader market is up, it’s not a great Tuesday so far for equities as stocks fade from the highs. Stitch Fix  (SFIX) - Get Report investors only wish their day was going like that, as the stock was tumbling 30%.

The massive decline briefly sent the stock to new all-time lows and came after the company’s disappointing fiscal second-quarter report.

While earnings of 11 cents a share did beat expectations by 4 cents, revenue of $451.8 million slightly missed expectations. The growth was disappointing for investors, who opted to sell en masse given the risk-off environment we're currently in. 

However, it wasn’t so much a disappointing quarter as it was the downbeat guidance. Management expects third-quarter sales of $465 million to $475 million. That was well short of consensus estimates looking for $506 million in revenue.

So the idea that a growth company is not growing as quickly as expected, combined with raging market volatility, has not been a peaceful concoction for Stitch Fix shares. Let’s look at the chart.

Trading Stitch Fix

Weekly chart of Stitch Fix. 

Weekly chart of Stitch Fix. 

The weekly chart above highlights more than Tuesday’s decimation. It shows how volatility has plagued this stock for several years, as well as how Stitch Fix stock has struggled since hitting a high near $50 in 2018.

In the fourth quarter of 2019, the stock broke out over a nasty downtrend resistance mark (blue line), a level that it was holding as support as recently as last week. With this week’s plunge though, clearly this mark is no longer support.

Stitch Fix is simply too risky in the current environment for most investors, and I would opt to skip this trade as a result. As we said earlier in the day in a technical piece about Coca-Cola  (KO) - Get Report, investors have to be willing to sit at the plate and not swing at every pitch that comes their way. Just because SFIX stock is sitting on potential support with a well-defined level on the downside - with $14.28 as the current low - does not mean it’s a trade worth taking.

However, risk-hungry bulls who want a piece of action may consider buying against Tuesday’s low. The $15 mark was significant in 2017 and is so far buoying shares on Tuesday.

On a rebound, let’s see if Stitch Fix stock can reclaim $18, a notable level over the past two years. Above that and prior downtrend resistance may very well come back into play. Above that and Stitch Fix should struggle with the $23.50 to $25.50 area, where it will find most of its major moving averages.