Macy's, Inc (M) got crushed after it lowered 2019 guidance on Thursday, with its stock dropping nearly 18% to an 11-month low. Other department store stocks fell in sympathy, sending shock waves across the brick-and-mortar group, which topped out in August after posting the strongest 12-month returns since the first half of the decade. This wickedly bearish price action waves all sorts of red flags, raising the odds that these stocks have entered the second phase of a secular decline that began in 2015.

Kohl's Corporation (KSS) has carved the best looking price pattern among the mall anchors, while lowly J. C. Penney Company, Inc. (JCP) appears headed toward eventual bankruptcy. Dillard's, Inc. (DDS) looks as bad as Macy's right now, trading near a 52-week low after hitting a three-year high in July 2018. Given the swift rise in bearish sentiment, it appears likely that all or most of these stocks will test and break 2018 lows in the coming months. (For more, see: Few Reasons to Own J. C. Penney Stock.)

Technical chart showing the share price performance of Macy's, Inc (M)
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Macy's stock posted an all-time high at $73.61 in July 2015 and turned sharply lower, entering a steep decline in reaction to Amazon.com, Inc. (AMZN) and other e-commerce vendors taking market share from brick-and-mortar retailers. The downside paused in the second half of 2016 and resumed after a post-election rally, dumping the stock to a seven-year low at $17.41 in November 2017. The subsequent recovery wave attracted healthy buying interest, reaching a 20-month high in August 2018.

The rally topped out at the .382 Fibonacci retracement level of the 2015 into 2017 downtrend, a common turning point for technical bounces within strong downtrends. This week's sell-off crossed the .618 rally retracement level, indicating extreme weakness, but dip buying could delay further downside while short sellers wait to reload positions in the lower half of the huge gap between $27 and $32.

Technical chart showing the share price performance of Kohl's Corporation (KSS)
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Kohl's shares ended a two-year uptrend at 2002 and 2007 resistance in the low $80s in 2015 and entered a steep decline that reached a seven-year low at $33.87 in May 2016. The stock spent 18 months testing new support, finally turning higher in a November 2017 uptick that completed a round trip into the 2015 high in June 2018. August, September and November breakout attempts failed, yielding a triple top breakdown into late December.

A strong bounce into 2019 mounted the broken 50-week exponential moving average (EMA) this week while the Macy's news triggered a gap down that reinstated resistance. This price structure suggests that the stock will trade into the upper $60s once again before entering a decline that tests the 2018 low. That down wave will also complete the right shoulder of a year-long head and shoulders topping pattern, with a breakdown ending the two-year uptrend.

Technical chart showing the share price performance of Dillard's, Inc. (DDS)
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Dillard's stock posted an all-time high at $144.21 in 2015 and sold off in a persistent downtrend that continued into May 2017's five-year low in the mid-$40s. It completed a two and a half-year rounded bottom in June 2018 and broke out, but the rally stalled one week later at the 50% sell-off retracement level, yielding a decline that reached the 50-week EMA in August. The stock tested support into November and broke down in a high-volume gap, establishing heavy resistance in the low to mid-$70s.

Selling pressure eased after the stock hit a 52-week low at the .786 rally retracement in late December, giving way to a bounce that stalled below the moving average last week. This week's decline has cut through the 50-day EMA, but that level is still in play, predicting mixed action in the mid-$60s until oversold technical readings ease. The December lows will likely get tested after that happens, with a breakdown exposing the 2017 low.

The Bottom Line

Brick-and-mortar department stores got pummeled after Macy's lowered guidance, signaling the potential resumption of the secular downtrend that started in 2015.

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