Battered drug store chain Rite Aid Corporation (RAD) is showing signs of bottoming out after a brutal downtrend that has given up an astounding 93% of the stock's value in less than three years and forced a 1-for-20 reverse split. While this isn't a call for a growth in market share or rapid recovery to triple-digit highs, a modest bounce in coming months could reward bottom fishers and value hunters with outstanding profits.

Even so, this is a work in progress after August's bounce off 10-year lows, warning market timers to let the pattern play out before taking long-side exposure. At this point, a legitimate buy signal will require price action to hold summer support near $6.00 and then rally above stubborn resistance near $10.00. Aggressive traders can play the turnaround at the lower level while the majority waits for double digits to sound the "all-clear."

RAD Long-Term Chart (1987 – 2019)

RAD
TradingView.Com

<Charts reflect price adjustments after the April 2019 1:20 reverse split.>

The stock traded in a narrow range between $140 and $233 between 1987 and 1995 and broke out, entering a powerful trend advance that posted an all-time high at $1,022.60 at the start of 1999. The subsequent decline was even more catastrophic than the current downtrend, dumping 97% to $30 in the first quarter of 2001. It bounced to $200 a few months later, marking the highest high in the past 18 years.

An August 2002 retest found support within three points of the 2001 low, but the subsequent uptick reversed below the 2001 high, ahead of a downswing that ended in the $60s. Price action held within those boundaries into a 2008 breakdown that broke the seven-year low during the economic collapse, dumping the stock to $4.00 in the first quarter of 2009. Keep that level in mind because Rite Aid stock bounced just a point higher in August 2019.

A rally into the third quarter stalled at new resistance, marking a price level that wasn't mounted until a 2013 breakout that raised hopes the company's darkest days had ended. Good vibes continued into 2014, when the uptick ended about 25 points under the 2001 high. The stock tested that barrier through the 2016 presidential election and rolled over, breaking a four-year trading floor in the second quarter of 2017. Selling pressure accelerated after the breakdown, yielding a steady downtick into August 2019's multi-decade low at $5.04.

RAD Short-Term Chart (2019)

RAD
TradingView.Com

The stock broke April 2019 support near $8.75 after the 1:20 reverse split, sold off to $6.14, and bounced into new resistance in June. It posted a lower low in August and turned higher once again, reversing at the same level twice in September. Sellers dumped price to a five-week low on Wednesday, raising the odds that the decline will carry into the lower red line in coming sessions. A sturdy bounce at that level will be bullish, potentially signaling the last leg of an inverse head and shoulders basing pattern, with a neckline near $10.00.

A breakout will generate a healthy measured move target between $14.50 and $15.00, with well-timed long positions potentially booking a 50% profit in a short time period. Even better, dip trades taken on a bounce above $6.00 could yield windfall profits, but tight stop losses will be needed to avoid major losses. The narrowly aligned declining 200-day exponential moving average (EMA) and December 2018 low mark an obvious obstacle, but short-term momentum could pierce that barrier and reach the target before an inevitable reversal that's likely to carve broad sideways action into 2020 or 2021.

The Bottom Line

Rite Aid stock may have bottomed out after a fierce three-year downtrend and could reward carefully placed long positions in coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.