Closeout retailer Big Lots (BIG) has put in a strong year-to-date move up along with the broader market. From August 2012 through January of this year, the stock traded in a choppy manner, but as the rally continued into February, it started to behave better from a technical point of view.
Along with other discount retailers, like Costco Wholesale Corp. (COST) and PriceSmart (PSMT), the stock currently sits at a bullish juncture. It has been consolidating sideways for four weeks and looks ready for a breakout past imminent resistance. If that happens, I am eyeing a quick rally to close the big down-gap dating back to Aug. 23.
The weekly chart shows that, in 2012, Big Lots held at support at the 61.8% Fibonacci retracement of the big rally dating back to early 2009. After topping in April 2012, the stock fell hard, and continued slipping until November. From there, it has been squeezed about 35% higher.
As there are two sides to every trade, I would be remiss not to point out that the stock recently retraced exactly 50% of the move from the April 2012 highs down to the November lows. Just as the November lows act as support, this may offer near-to-intermediate-term resistance for the bulls.
In other words, BIG is currently wedged between two key Fibonacci retracement levels on its weekly chart, one bullish and one bearish.
The daily chart below currently offers some compelling near-term reference levels to watch. Since gapping higher on March 6, the stock has traded in a sideways consolidation phase, causing maximum frustration to those looking for a breakout play.
For now, the consolidation phase may be looked at as a bull flag formation, which as the name implies, usually resolves to the upside. But it is important not to enter the trade prematurely, but rather wait for a daily close above the $36 mark.
Near-term support is being offered by the stock's 50-day simple moving average (blue line), which it briefly tested and bounced off of in early April.
Should the stock flash an entry signal on a daily close above $36, it would then start working into a still unfilled gap that dates back to Aug. 23. As many gaps eventually tend to completely retrace/fill, a convenient profit target for this trade setup would be at the top of the gap near $38.60.
Given that earnings season is set to kick into high gear this week, it is crucial not to get antsy about this trade setup. Wait patiently for a potential breakout past the $36 resistance. Big Lots isn't scheduled to report earnings until May 23, leaving plenty of time for the trade to work out once a buy signal is given. Stops can be kept tight near $35, close to the rising 50-day moving average.
Recommended Trade Setup:
-- Buy BIG on a daily close above $36
-- Set stop-loss at $35
-- Set price target at $38.60 for a potential 7% gain in 3-6 weeks
- Big Lots