Brick and mortar retail stocks got hammered on Thursday after Macy’s Inc (M) and Kohl’s Corp (KSS) warned about fourth quarter sales while lowering forward guidance. Their double-digit percentage declines signal the end of the group’s oversold rally and the resumption of steep downtrends that may continue into 2018 and beyond. While chasing downside short sales is a risky proposition; these issues should offer a variety of lower risk sales in coming weeks.

E-commerce continues to take significant market share from mall anchors and other physical selling portals, continuing a multi-decade paradigm shift that started with Amazon.com Inc’s (AMZN) 1997 public offering. Affected retailers have belatedly built their own online portals and are reporting robust digital results, but those sales haven’t recouped much larger losses at traditional storefronts.

M

Macy’s fell more than 14% in the first hour of the session, breaking a 7-month trendline, dropping to a 6-month low and entered a dangerous test at May’s downtrend low just below 30. Price action between then and now carved a bear flag pattern that pushed above the 200-day EMA in November, attracting significant sidelined capital that’s now trapped in a major decline.

A bounce into the broken support zone between $34.50 and $36 (blue lines) would signal a low-risk short sale opportunity, ahead of a possible breakdown that targets the low 20s. That recovery effort appears likely, given the generally bullish On Balance Volume (OBV) pattern. A lower trade entry is possible, but we’ll have to wait for the testing to play out in a process that’s likely to last for several weeks. In the meantime, aggressive traders with established track records can play downside momentum swings, hopefully catching a violent breakdown.

KSS

Kohl’s dropped 18% in opening action, leaving behind a bearish island reversal while failing an 11-month breakout above a trendline of lower highs in the mid-40s. That rally stalled at the 50% selloff retracement in December after attracting significant accumulation that lifted OBV to an all-time high. These bagholders are now feeling significant pain that should translate into significant selling pressure in coming months.

The broken trendline now marks major resistance but the decline also broke 200-day EMA support, which the stock mounted in the November breakout. That barrier sits a few points higher than the trendline and could be reached during a short squeeze, which seems inevitable given the bullish volume pattern. A rally above that level would signal bad news for short sellers, presaging a larger scale recovery that could easily fill the gap.

DDS

Dillard’s Inc (DDS) fell 10% in sympathy with other mall anchors, although it still hasn’t reported holiday sales results. The stock carved a more bearish pattern than its rivals in recent months, failing to attract sidelined capital at the same pace. This is evident in the OBV pattern, which failed to end the string of lower highs in place since the 2015 top. As a result, the indicator could hit a downtrend low ahead of other storefronts, generating a more powerful sell signal.

The selloff has dumped the stock into the fourth test at the May 2016 low, which also marks a 4-year low. This also follows three failed attempt to rally above the 200-day EMA, keeping the downtrend fully intact while generating a selling target after a breakdown at a declining lows trendline in the low 40s. That price action would also trigger a failed breakout above the 1993 high at $52 in 2011.

The Bottom Line

Macy’s and Kohl’s shocked retail market watchers this week, warning about limp holiday sales while lowering 2017 guidance. This news signals a resumption in steep downtrends that should offer excellent short sale opportunities in coming months.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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