Many brick-and-mortar retail stocks have reached tough resistance levels after multi-week recovery waves and could offer profitable short sales for well-timed positions. Department stores and sector funds look like best bets at this juncture, but the large pool of components in active downtrends could offer other short plays as well. Just keep one eye on the calendar because the usual Christmas sales hype will be hitting the airwaves in the fourth quarter.

Many sector components posted multi-year lows in August, just before President Trump announced the resumption of trade talks with China, but tariffs affecting the group are still scheduled for implementation in October and December. Few Wall Street analysts expect the superpowers to reach an agreement at this late date, especially with the 2020 election less than 14 months away.

Chart showing the share price performance of the SPDR S&P Retail ETF (XRT)
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The SPDR S&P Retail ETF (XRT) topped out just above $50 in 2015 after a multi-year uptrend and sold off into the upper $30s in 2016. A 2018 breakout attempt failed, generating a steady downtick that finally ended at range support in December. The recovery wave into March 2019 stalled near the .618 Fibonacci retracement level, yielding a second test of the multi-year trading range in less than a year.

The bounce into September has stalled at the .382 retracement level and 200-day exponential moving average (EMA), which broke on heavy volume in November 2018. March and April recovery waves ended at that formidable barrier, predicting that the most recent turnaround will offer low-risk short sale entries, ahead of a decline that could break multi-year support and drop the fund into a secular downtrend.  The on-balance volume (OBV) accumulation-distribution indicator adds reliability to this prediction, posting a long series of lower highs.

Chart showing the share price performance of Macy's, Inc. (M)
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Macy's, Inc. (M) stock completed a round trip into the 2007 high in the mid-$40s in 2013 and broke out, posting an all-time high at $73.61 in 2015. It failed the breakout a few months later, descending in a brutal decline that ended at $17.41 in 2017. The subsequent uptick stalled at the .50 sell-off retracement level in June 2018, yielding a steady downtick that broke the 2017 low on heavy volume in August 2019.

The bounce into September has now reached the bottom of August's breakaway gap and 2017 resistance as well as the 50-day EMA, which has limited the upside since an August 2018 breakdown. More ominously, the summer swoon broke deep harmonic support at the .786 retracement of the 2009 into 2015 uptrend, establishing a downside target at the 100% retracement, deep in the single digits.

Chart showing the share price performance of Hudson Ltd. (HUD)
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Small-cap retailer Hudson Ltd. (HUD) came public near $18 in February 2018 and sold off to $14.23 in April. The uptick into September posted an all-time high in the mid-$20s before giving way to a decline that broke the IPO opening print in December. The decline ended near $13 in February 2019, yielding a complex trading range that carved a head and shoulders pattern, with a slightly rising neckline (red line).

The stock broke down in late July and posted an all-time low at $10.33 just before Labor Day. The bounce into this week has reached neckline resistance, raising the odds for renewed selling pressure that should complete the breakdown and reach the single digits. Just keep in mind that this is a thinly traded stock, making it harder to borrow shares for short sales, while wider-than-average spreads may add hidden costs.

The Bottom Line

Brick-and-mortar retailer stocks bounced in August after posting new lows and have now reached resistance levels that favor renewed downside, raising the odds for profitable short sales.

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