Dick’s Sporting Goods Inc. (DKS) has emerged as a top player in its recreational retail segment, with more than 700 U.S. storefronts underpinned by bankruptcies that have eliminated key competitors Sports Authority and Golfsmith. The Pennsylvania-based powerhouse has taken full advantage of their misfortune, scooping up those assets, properties, and inventory in public auctions.

The company reported in-line revenues while beating EPS estimates in their fourth-quarter earnings release on Tuesday morning but reduced first-quarter and fiscal year 2018 guidance, triggering an 8% decline in the first hour of the U.S. session. The warning highlights challenging retail industry conditions, triggered by a persistent exodus out of brick-and-mortar operations into e-commerce sales.

DKS Long-Term Chart (2003–2017)

DKS

The company came public at $3.63 (post two splits) in October 2002, right at the end of the Dot.com bear market, and entered an immediate uptrend that posted two rally waves into the 2007 top at $36.78. It pulled back into the mid-20s into 2008 and then plunged with world markets during the economic collapse. That furious decline ran out of steam in single digits in November, pounding out a 5-year low at $9.21.

The subsequent recovery wave unfolded at the same trajectory as the previous decline, lifting back to the 2007 high at the end of 2010. Aggressive sellers entered positions at that level, triggering a broad sideways pattern that completed the handle of a cup and handle pattern, ahead of a 2012 breakout, That uptick lifted quickly to $51.65 and died, giving way to erratic price action that posted nominally higher highs into January 2014.

A vertical May 2014 selloff undercut 2-year support in the mid-40s, dropping to $41.30, ahead of a bounce that stalled at the January high and rising highs trendline in April 2015. A larger-scale downtrend then set into motion, picking up steam into year’s end while dropping the stock to a 4-year low in the lower-30s. It tested that level for two months, ahead of a recovery wave that reversed at the rising highs trendline in November 2016, marking the sixth failure at that level.

Price action since 2012 has carved a bearish broadening formation a.k.a. megaphone pattern, with higher highs and lower lows generating unacceptable risk to long-term positions on both sides of the aisle. Specifically, the lack of a higher low since early 2016 exposes the stock to a decline into the mid-20s, marking a 50% decline from currently traded level. It’s no better for short sellers because a bounce at the 50-month EMA just below $50 could easily find its way up to rising highs resistance.

DKS Short-Term Chart (2015-2017)

DKS

A Fibonacci grid stretched across the 2016 recovery wave organizes seemingly chaotic action, with the current decline finding support at the 50% selloff retracement level in February. It now needs to hold last month’s low at 48.06 or risk a continued decline into the mid-40s. That violation would also confirm new resistance at the 50- and 200-day EMAs, a primary requirement for a new secular downtrend.  

On Balance Volume (OBV) has carved a more bullish pattern than price since November 2015, lifting off a deep low in a powerful accumulation wave that reached an all-time high at the end of 2016. This bullish divergence predicts that price will eventually play catch-up and recoup lost points between this week’s post-earnings decline into the upper-40s and the 2016 high at $62.88.  

The Bottom Line

Dick’s Sporting Goods is selling off after meeting quarterly estimates but reducing quarterly and full-year guidance. A strong institutional shareholder base should keep a solid floor under falling price, allowing the stock to recover lost ground at a rapid pace.

<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>

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