It seems like you can find a CVS or Walgreen drug store on every third block across the United States. This group has exploded over the past few years as they chip away at grocery and convenience stores. This group as a whole was performing quite well for most of 2009 and some stocks were not too far off their bull market highs. However, this group has been looking poorly lately, having given up a large part of its 2009 rally.
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After rallying most of 2009, Walgreen Company (NYSE:WAG) settled into a consolidation well into 2010. It suffered through a few bouts of selling, but held support near $33 on a few occasions. In May, the bulls decided they weren't buying any more stock and WAG sliced through the bottom of its base. It attempted to bounce back, but sellers overwhelmed buyers and promptly sent WAG down several points. Volume has increased on this drop, showing that institutions are likely participating in the selling. WAG is approaching a possible support level in the $28 range, but it will likely take some time for this stock to heal from the damage it so recently suffered. If WAG loses the $28 level, the selling may escalate even further.
CVS Caremark Corporation (NYSE:CVS) has had a very volatile past few months. After rallying in step with WAG for most of 2009, CVS suffered through a nasty gap down in November. It spent the majority of the next several months recouping those losses only to fall short of the prior highs and then promptly give most of the gains back. CVS is technically holding up better than WAG, as it is still above its recent low despite the recent price action being very weak. The level to watch in case CVS continues to fall would be near $28-$29. This level attracted aggressive buying on the last drop and may entice the bulls again.
Rite Aid Corporation (NYSE:RAD) suffered much worse through the bear market, hitting a low of 20 cents in 2009. It rallied sharply from that low to over $2 a share before settling into a consolidation in late 2009. It attempted to break out in March 2010 and failed horribly. It fell to the bottom of the channel and recently followed the rest of its peers lower as it broke under its base. RAD is actually trading at its 52-week lows and testing the important psychological level of $1 per share. Even if it holds at this level, there may be an abundance of sellers around $1.30-$1.50. (For more, see Support And Resistance Basics.)
While the declines in the drug store stocks mentioned above are certainly not pretty, they pale in comparison to the price action in China Nepstar Chain Drugstore (NYSE:NPD) over the past few months. NPD had been in a good-looking consolidation from the tail end of 2009 into 2010 after a strong rally off its bear market lows. NPD was testing the important price level near $7.50 for a breakout in April 2010. It pulled back off that level in what appeared to be a typical retracement. It fell off a cliff, however, as it plunged more than 50% in a few weeks. NPD may be near a capitulation as volume has really picked up recently after such a large decline. NPD is also trading at its prior bear market lows, which could bring in some buyers. While the possibility that support can be found in this area is likely, traders should be wary of this stock as healthy stocks should not be trading near the lows set during the last bear market. It may take some time for this stock to work its way higher again. As a result, bottom pickers may be better served looking for stronger stocks.
While I see the same lines when I visit my local CVS, something is causing investors to back away from this group. Even if these stocks find support, when it comes to having a quick recovery the odds are stacked against them. While it is tempting to look for value in beaten down stocks, traders should be cognizant of the fact that it will likely take a long time for sellers to die down. For active traders, it is usually a much better idea to focus on stocks that have maintained strength through market weakness.
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.