Ubiquitous mall denizen Foot Locker, Inc. (FL) triggered a footwear freefall on Aug. 18 after missing top- and bottom-line estimates in its second quarter earnings report. The stock fell more than 13 points in that session, posting the lowest low in almost four years while dragging down athletic apparel giant and Dow component Nike, Inc. (NKE), ending its two-month recovery effort with a two-point gap and bearish island reversal.

DSW Inc. (DSW) eased bearish sentiment on Tuesday morning, with the stock lifting more than 21% after the company beat EPS and revenue estimates while reiterating fiscal year 2018 guidance. The news set off a sector reversal and short squeeze, but the relief rally is likely to run into a buzzsaw of trapped shareholders looking to get out while aggressive short sellers use the opportunity of higher prices to add to profitable positions. (See also: Nike Signs Biggest Shoe Deal in NFL History.)

 

Foot Locker stock entered a strong uptrend after the 2008 market crash, posting a long string of new highs into the second half of 2015, when its topped out at $77.25. A decline into 2016 found support near $51, ahead of a recovery wave that stalled just two points above the prior high in December. Nearly six months of testing at that resistance level failed to yield a breakout, with aggressive sellers finally taking control after the May 19 earnings report.

The decline settled in the mid-$40s in mid-June, bouncing at that level in July but failing to make substantial progress into last week's ugly confessional. It gapped down more than 11 points following the news and lost five more points into Tuesday's oversold bounce. Traders should look for a repeat of the May into August price pattern, with weak bounces and a stair-step decline that could easily reach the upper teens. (For more, see: Foot Locker Stock Plunges on Q2 Earnings and Sales Miss.)

 

Nike shares scraped the bottom of the 2016 Dow performance list, but the future looked brighter after an upbeat June 2017 earnings report triggered a strong recovery rally. (See also: Nike Stock Headed Into Slow but Steady Recovery.) The stock ended a long uptrend at the same time as Foot Locker in 2015 and entered a complex correction that found support in the upper $40s in the fourth quarter of 2016. It broke out above a long trendline​ of lower highs in July 2017 but failed the breakout when it gapped down last week.

The decline also left behind a bearish island reversal, with the August sell gap taking back gains posted during the July buy gap. However, a small dose of optimism may be warranted because the decline has filled the July gap, perhaps setting the stage for a larger-scale recovery into year end. However, all bets are off if the stock fails to hold the 2016 low at $49.01, because that breakdown would signal the start of a secular downtrend. (For more, see: Nike and Under Armour's Growth Went to Adidas and Puma.)

 

DSW squeezed short sellers on Tuesday morning after beating second quarter EPS and revenue estimates while reiterating fiscal year 2018 guidance. This footwear play topped out in late 2013 following a four-year uptrend that posted an all-time high at $47.55. It spent the next two years building an Adam and Eve topping pattern that broke to the downside in November 2015.

Price action hugged the breakdown level in the mid-$20s throughout 2016, ahead of a January 2017 decline that continued into Monday's six-year low at $15.14. The post-earnings rally has lifted the stock into the top of a choppy three-month trading range and into heavy resistance at the 200-day exponential moving average. Given that formidable barrier, it is likely that this short squeeze will run out of steam quickly, with the prevailing downtrend quickly filling Tuesday's three-point rally gap. (See also: DSW Continues Store Expansion, To Open Store in New Jersey.)

The Bottom Line

Last week's dismal Foot Locker quarterly report dropped major sector players to new lows in volatile declines that have paused following an upbeat DSW quarter. Traders should look for committed sellers to prevail in this two-sided price action, dropping the group to even lower 2017 and multi-year lows. (For additional reading, check out: Consumer Stocks May Be the Canary in the Coal Mine.)

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

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