Many stocks in the S&P 500, as well as the index itself, formed a topping pattern known as a "double top" during the final four months of 2018. The pattern typically occurs after an extended bull market on declining volume and forewarns an impending downside reversal.
When discussing the S&P 500's then developing double top with Business Insider in late September, said David Rosenberg, chief economist for Toronto-based Gluskin Sheff + Associates. "It's important because every topping process in the market for the past five decades featured a second high that was met with poorer volume and breadth than the first test." Even though the pattern conforms to the wealth management firm's research, traders should wait for retracements to locate high-probability entry points before taking a short sale.
These stocks have formed classic double top patterns and may offer traders with rewarding short opportunities in early 2019. Let's take a look at three possible trades.
Rollins, Inc. (ROL)
Rollins, Inc. (ROL), with a market capitalization of $11.68 billion, provides pest and termite control services to residential and commercial customers in North America and Australia. The Atlanta-based company operates through a franchise system in other markets including Europe, Central America, the Caribbean, the Middle East, Asia, the Mediterranean, Africa and Mexico. As of Jan. 2, 2019, Rollins stock offers a 1.03% dividend yield and has fallen nearly 15% over the past month.
Rollins shares formed a double top between September and December last year. Bearish technical divergence occurred when the second top reached a higher peak than the first top but the relative strength indicator (RSI) reached a lower peak. Traders should consider shorting the stock at the $37 level where the price finds a confluence of resistance from the 200-day simple moving average (SMA), the double top's neckline and the 38.2% Fibonacci retracement level. Set a stop-loss order above the 50-day simple moving average (SMA) to protect trading capital. Look to cover near the December swing low.
Kohl's Corporation (KSS)
Founded in 1962, Kohl's Corporation (KSS) offers apparel, footwear, accessories, beauty and home products through roughly 1,150 physical stores as well as its website. In recent years, the company has faced increased competition from off-price retailers such as The TJX Companies, Inc. (TJX) and Ross Stores, Inc. (ROST). Trading at $66.34 with a market cap of $10.74 billion and paying a 3.68% dividend yield, the retailer's stock has returned -0.33% over the past month as of Jan. 2, 2019. Traders should be aware that the issue has nearly 20% short interest that could result in a sudden short squeeze rally if a positive development occurs.
Although Kohl's stock has outperformed the department stores industry average by over 7% during December, its share price hits significant resistance at $70 from the October swing low, the 50-day and 200-day SMAs, and the 50% Fibonacci retracement level. Traders who short the stock in this area should look to book profits on a fall back to the Dec. 24 low at $58.66 and place a stop three to five points above the entry price.
Regency Centers Corporation (REG)
Regency Centers Corporation (REG), operating as a real estate investment trust (REIT), owns, manages and has interests in almost 350 neighborhood shopping centers located in affluent and densely populated trade areas. Key property locations include California, Florida and Texas. Regency stock pays investors an attractive 3.78% forward dividend yield but has disappointed performance wise over the past month, dropping nearly 8% as of Jan. 2, 2019.
Like many stocks in the S&P 500 index, Regency fell below its 200-day SMA in December before bouncing slightly on below-average volume in the last few trading sessions of 2018. Look to open short positions if the price retraces to the $61 level – an area where it's likely to encounter resistance from a horizontal line, the 50% Fibonacci retracement level and the 200-day SMA. Traders could set take-profit orders at either $56 or $54 – both key support areas. Consider cutting losses if the stock moves much above $63.