The Kroger Co. (KR) said little about its pick-up and delivery initiatives when the company reported mediocre first quarter earnings in June. Revenues fell 1.2% year over year during the period, indicating that these services are having little or no impact on the supermarket chain's bottom line. Market players responded with their feet in the weeks following the release, dumping the stock more than 12% to a 52-week low. Though Kroger is technically considered to be recession-resistant, it is not recession-proof.

Wall Street analysts expect little improvement when Kroger reports second quarter earnings on Sept. 12, with low expectations calling for earnings per share (EPS) of $0.41 on $28.4 billion in revenue. Bernstein analyst Brandon Fletcher summed up the cautionary attitude in a recent note, skeptical that Kroger will hit its projected 2.00% to 2.25% comparative sales guidance. He also expects activist shareholders to demand aggressive changes if the company reports weak numbers once again, potentially keeping a floor under the next selling wave.

The Cincinnati-based chain faces competitive challenges on all sides, with Costco Wholesale Corporation (COST) reporting healthy grocery sales while Amazon.com, Inc. (AMZN) and Dow component Walmart Inc. (WMT) are ramping up low-cost delivery services that will take a big bite out of traditional brick-and-mortar sales in coming years. In addition, margin pressures in Kroger's profitable pharmacy segment have grown since Aetna's merger with CVS Health Corporation (CVS) in November 2018, reducing an important profit stream.

KR Long-Term Chart (1992 – 2019)

Long-term chart showing the share price performance of The Kroger Co. (KR)
TradingView.com

A steep downtrend ended at a split-adjusted $1.41 in 1992, giving way to a powerful trend advance that continued to post new highs into the 1999 peak at $17.45. That print marked the highest high for the next 14 years, ahead of a two-legged decline that found support at $5.50 at the end of the 2000 to 2002 bear market. The stock posted respectable gains during the mid-decade bull market, stalling less than two points under the prior peak in 2007.

A 2008 breakdown during the economic collapse posted losses in excess of 30% before easing into a narrow trading range between $10 and $13. That quiet pattern persisted into a 2012 range breakout that attracted strong buying interest and an impressive positive feedback loop, completing a round trip into the 1999 high in 2013. It broke out immediately, posting the most prolific gains so far this century into January 2016's all-time high at $42.75, and turned sharply lower into the fourth quarter of 2017.

A strong bounce stalled at the 50% sell-off retracement in 2018, while an equally dynamic decline into 2019 gave up nearly all gains posted in the past two years. This two-sided price action looks extremely bearish, raising the odds that the stock will eventually drop into the upper teens and test closely aligned support between the 2017 low and 200-month exponential moving average (EMA). That marks a final line in the sand for remaining bulls because Kroger has traded above the moving average for the past 17 years.

Ironically, bulls have the upper hand right now despite steep 2019 losses because the monthly stochastics oscillator has entered a buy cycle from an extremely oversold technical reading (blue line) that presaged sturdy 2016 and 2017 upticks. This relative strength could easily persist into year end, lifting Kroger stock into the upper $20s or low $30s. Even so, the bearish technical outlook won't improve unless the rally mounts the September 2018 high at $31.59 and completes a double bottom reversal.

The Bottom Line

Kroger stock is trading perilously close to 2017 support, but long-term relative strength cycles have turned higher ahead of next week's second quarter earnings report. This technical tailwind, taken together with low expectations, could ignite a multi-week buy-the-news reaction that catches short sellers off-guard.

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