Advance Auto Parts Is Driving Toward a Big Gain

The retail auto parts sector has been an outperformer for the last several years, but it experienced a decline that lasted from November of last year until early this year. Advanced Auto Parts (AAP) fell even more sharply than other stocks in the space, but now it's breaking out of a basing pattern, which could be the catalyst that sparks a move to close a 20% underperformance gap.

The weekly chart highlights the price action in three auto parts retailers over the last two years. The green line is Auto Zone (AZO) , O'Reilly Automotive (ORLY) is in blue, and the red line is Advanced Auto Parts. All three stocks made highs in November last year, with O'Reilly and Auto Zone shares pulling back 14% into the end of the year, while Advanced Auto dropped over 15% in just one day after reporting disappointing third-quarter earnings results. It went on to double that loss before finding support this year.

Both O'Reilly and Auto Zone have traded back up to their November highs, but Advanced Auto has lagged its competitors. That dynamic may be about to change, with the stock breaking above a key technical resistance level.

The decline in AAP shares moderated earlier this year, and the stock began consolidating below the $155 level. The price action this week took out that resistance, and if the stock is able to hold this level, a double bottom would be in place.

Daily moving average convergence/divergence is overlaid on a weekly histogram of the oscillator and is crossing above its centerline on both timeframes. It has also been in bullish divergence to price since the end of last year, and these readings reflect positive price momentum on both the short and intermediate term time frames.

The aroon indicator is designed to identify emerging trends and consolidation periods and to anticipate reversals. In this case, the declining parallel aroon lines that followed the February high reflect the consolidation that the stock was undergoing, and the recent green "up" line cross above the red "down" line suggests the start of a new uptrend. Confirmation of the momentum indications will require overall volume to improve and the accumulation/distribution line to move off its 21-period signal average. The money flow indicator, a volume-weighted relative strength measure, is above its centerline, reflecting an increase in money flow momentum.

The basing pattern projects a price target in the $176 area, which is the bottom of the large gap that formed after the November earnings report. Nature and price abhor a vacuum, and if the stock achieves its pattern objective, it might be drawn higher by the need to fill the empty space.

Advance Auto Parts is a long candidate at its current level, using a trailing percentage stop.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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