Technical Alert: This 115-Year-Old Retailer Is Breaking Out
If you’ve traded for some time, you know just how powerful and accurate chart patterns can be.
Technical patters are similar to the scarecrow in the “Wizard of Oz.” They may not “know” where the stock is supposed to be going, but they lead the way successfully because so many people trust in them, just as Dorothy trusted in the brainless-but-loveable character.
Like the scarecrow, chart patterns are constructs of human actions.
And while the scarecrow couldn’t make up his mind when it came to which path to take, certain chart patterns are very conclusive. They act almost like a GPS leading you to a stock’s next move.
#-ad_banner-#Golden crosses and death crosses, in particular, are two very influential trend-changing technical formations. Both can cause big, intermediate-term moves in a stock.
For those who may not be aware, golden crosses are a bullish formation in which the 50-day moving average crosses above the 200-day, with the stock above both. The death cross is when the 50-day drops below the 200-day, with the stock below both.
These are generally powerful signals. For instance, a recent golden cross in Apple (Nasdaq: AAPL) led to a rally in the stock (my Profit Amplifier subscribers were able to turn a 2% move into a 16.5% profit).
But the golden cross and the death cross each have an Achilles’ heel.
Without support from a stock’s fundamentals (either bullish or bearish), the effectiveness of these crosses may be greatly reduced.
This 115-Year-Old Retailer Keeps Up While Its Peers Fall Short
A golden cross just occurred in Nordstrom (NYSE: JWN), which has been in operation as a high-end clothing retailer since 1901. Like Apple at the time of its golden cross, this company is on the comeback trail with strengthening sales and growing fundamental support from analysts.
And Nordstrom’s golden cross formation led me to recommend a trade to my Profit Amplifier readers that could be good for a 22% return by December.
Starting as a boutique shoe store in Seattle, Nordstrom has grown to become a household retail name in North America with 334 stores in 39 states and across Canada. As shopping trends have evolved in both taste and method of purchase, and while other retailers were getting left behind, Nordstrom managed to adjust its businesses to cater to changing demand. The good news for us is that the turnaround is still in its early innings, which should mean continued upside in the shares.
What you might not know is that the majority of its stores (205) are branded as Nordstrom Rack, offering discounted goods to consumers. The lower-priced goods keep the company relevant with average income shoppers, and it seems that Nordstrom has managed to successfully build on the discount outlets without destroying the company’s reputation.
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Nordstrom Rack’s $3.53 billion income now accounts for nearly 25% of Nordstrom’s total annual sales, compared to 18.5% just five years ago. That’s proof positive that Nordstrom’s growing more than just store counts.
And that growth isn’t just limited to Nordstrom Rack. Nordstrom’s entire ecosystem is operating in synergy as overall net revenues have grown 55% from $9.3 billion in fiscal 2010 to $14.4 billion in fiscal 2015.
Another positive surprise and potential future growth catalyst is Nordstrom’s e-commerce business. In early 2015, the company laid out an e-commerce action plan that was expected to cost billions. The plan was an “Omnichannel” plan that integrated Nordstrom’s stores and its online business. I knew it would take time to implement and there would be struggles along the way (which is why I was bearish on the stock for a bit), but the unique approach is finally paying off.
Nordstrom also has a unique edge when it comes to its store locations. A recent research report by Credit Suisse found that more than 62% of Nordstrom’s 120 or so main stores are located in the “most valuable” U.S. malls, giving them a disproportionate edge over the competition and providing the exposure they need to America’s wealthy consumers.
As we all know, America’s wealthiest tend to spend money even when the average consumer might be slowing down.
All these factors are likely why earnings per share (EPS) estimates have been on the rise. But estimates are still tempered as quarterly sales expectations remain low. Despite this, shares rallied and have continued to do so. My point is that expectations for Nordstrom remain low, giving the company a much smaller hurdle to eclipse. And at 17.2 times forward earnings, the stock still trades at a discount to the S&P 500.
While I expect more upgrades from analysts leading up to the Nov. 10 earnings report and a beat from the company when it announces, we likely won’t need to wait that long.
A Golden Cross Accelerates The Bullish Outlook For JWN
Since falling below its 200-day moving average back on Aug. 15, 2015, JWN has been in a bearish trend that it was unable to shake until its most recent earnings report, when shares started trading back above this long-term trendline.
Shortly after shares stabilized above that level, JWN’s 50-day moving average crossed above its 200-day, forming the bullish golden cross on Sept. 21.
Shares of JWN currently remain above both moving averages, which basically completes the requirements for a golden cross-induced breakout. Usually traders like to see shares remain above the cross for two to three days for confirmation of the indicator, which we’ve also now seen in JWN. I’ve seen typical breakouts move a stock anywhere between 2% and 10%.
Looking at areas of technical resistance can help us pin down an achievable target price.
The first resistance level comes at $53.77, and should easily be reached given the fundamental and technical catalysts I’ve outlined. The next level is $57.85, and that should also be a relatively easy level for the stock to reach. The golden cross should attract investors scanning the markets for bullish technicals, as well as trigger algorithms and auto-trading programs that can drive these breakouts quickly higher.
Now, for most traders, you could simply buy Nordstrom and enjoy the breakout. But for the purposes of Profit Amplifier, my readers and I recently entered into a simple options trade that has the potential to amplify even just a 5% move into a potential 22% windfall by November. If you’d like to learn more about options and how this trade works, I encourage you to follow this link.