Shares of e-commerce pet product supplier Chewy, Inc. (CHWY) nearly doubled in just two weeks in March, with investors jumping on board after the closing of pet stores and other chains catering to our four-legged friends. The stock is trading lower after Thursday's earnings release, despite in-line fourth quarter 2019 revenue and first quarter revenue guidance above the current Wall Street consensus. Even so, Chewy lost money during the quarter, posting a 12-cent non-GAAP loss while continuing an unbroken string of red ink since its initial public offering (IPO) in June 2019. 

This marked the first time since coming public that Chewy has met earnings per share (EPS) expectations, which were helped along in the second half of the quarter by stay-at-home and shutdown orders. However, Costco Wholesale Corporation (COST), Walmart Inc. (WMT), and other big box retailers are still open for business, selling pet food and accessories at highly competitive prices. This should limit gains for Chewy stock in the coming months.

Chart showing the share price performance of Chewy, Inc. (CHWY)
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The newly minted Chewy shares opened for business at $36.00 on June 14, 2019, posting an all-time high at $41.34 in that session and entering a channeled downtrend that bottomed out in the low $20s in November. Subsequent price action completed a double bottom reversal in December, but the rally failed in the first half of March, dumping through the 2019 low and into an all-time low at $20.62 on March 12.

Momentum traders then stepped in, lifting the stock in a vertical advance that lasted for 13 sessions into the March 30 peak at $39.63. It has been pulling back since that time and hit a six-day low in the first hour of Friday's session. This price action is testing the short-term breakout above the six-day trading range that ended on March 26, with a breakdown exposing continued downside into the 50-day exponential moving average (EMA), currently rising from $30.

This is a golden era for household pets, with their masters at home from work through April and perhaps beyond. However, pet-focused sales are cyclical in nature because owners spend less for food and medical treatment during economic contractions than they do during expansions. It's clear that the economy is in for a rough patch that could put a lid on gains at Chewy and its few publicly traded rivals.

Chart showing the share price performance of the ProShares PetCare ETF (PAWZ)
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Traders and investors lost one of the most liquid sector plays when VCA Inc., better known as WOOF, was bought by privately held Mars Inc. in 2017. That company now owns several animal hospital chains, but there's no way for speculators to grab a piece of the action. However, investors and short sellers looking for sector exposure can now play the ProShares PetCare ETF (PAWZ), which came public in 2018.

This thinly traded fund opened at $41.03 on Nov. 7, 2018, and entered an immediate downtrend that bottomed out at $33.92. The subsequent bounce completed a 100% retracement into the prior high in April 2019, breaking out one month later. The uptick stalled in the mid-$40s in June, while breakout attempts through July failed, yielding a topping pattern that broke to the downside in August.

A higher low at $38.21 in October gave way to a steady advance that reached new highs in December. The uptrend posted an all-time high at $47.07 in February, giving way to a vertical downdraft that relinquished 15 points and 33% in just 18 sessions. The fund has bounced into April but still hasn't reached heavy resistance at the closely aligned 50- and 200-day EMAs in the low $40s.

The Bottom Line

Chewy stock is pulling back from a 10-month high after reporting in-line quarterly revenues and raising guidance in reaction to a sales spike generated by the pandemic. 

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