Retailer Macy's (NYSE:M) has moved higher along with the broader market in 2013, although in relative terms it has somewhat underperformed, up only 6% at the start of this week, before pulling back along with the market.
During the past 11 months, the stock has routinely bumped against a significant area of resistance near $42. Last week, the stock finally closed above that level, getting the bulls exited, but then reversed back down.
While the stock is currently consolidating, it is poised to push past resistance for a quick rally of 10% or more. It is well supported by its simple moving averages, as well as defined Fibonacci support levels in multiple time frames.
Starting off my analysis with a multi-year look at Macy's, the uptrend is steady and confined to an orderly uptrending channel. During the past four years, M stock has displayed a beautiful series of higher lows and higher highs. With the stock currently trading at about $41, it is now roughly 14% off its all-time highs at $46.70, which date back to March 23, 2007.
Zooming in on a daily chart of Macy's, the 11-month resistance area near $42.50 is easier to see. Since the stock first marked resistance in this area, a series of higher lows have formed that are coiling up the stock for an eventual, and potentially powerful, break through this level.
While M stock doesn't respect its 200-day simple moving average particularly well, the 50-day, 100-day and 200-day moving averages sit within a few percentage points of each other and collaboratively should form solid support. Any break below all three moving averages at this stage would likely signal a change of trend and serves as a good stop level of last resort for longs.
On the next chart, we can see that the stock is also coiled up on two important support levels in multiple time frames.
The swing from the August 2011 lows up to the May 2012 highs eventually corrected exactly 50% in July, shortly after the broader market bottomed. The next swing higher from the July bottom to the November highs -- the second test of the $42.50 area -- eventually pulled back in December to the 61.8% Fibonacci retracement level.
When measuring price targets for swings that hold at important Fibonacci support lines, my first upside targets are at the 23.8% extension mark. In the case of the August 2011 to May 2012 swing, a 23.8% Fibonacci extension of the swing calculates a price target almost exactly at $46.70, which of course, is the aforementioned all-time high in the stock.
From a trade management point of view, it is important not to chase the stock higher until we see a clear daily break above the $42.50 resistance area. Given this crucial resistance, the stock may well see another few days of consolidation before a potential break occurs. The company is not scheduled to report earnings until May 15, so the single-stock headline risk is somewhat diminished, which could further help a clean break out past resistance.
Recommended Trade Setup:
-- Buy M on a daily close above $42.50
-- Set stop-loss at $41.50
-- Set initial price target at $46.70 for a potential 10% gain in 4-8 weeks