Rite Aid is the largest drug store chain on the east coast of the country and ranks third in the United States. The stock rebounded on the news that it was expanding its partnership with the U.S. Department of Health and Human Services (HHS). The drug store increased its policy of providing COVID-19 tests across the country. Its goal is to help curb the effects of the pandemic.
Rite Aid stock is not cheap, with an elevated P/E ratio at 90.93 without a dividend, according to Macrotrends. The stock closed last week at $14.35, down 7.2% year to date and in bear market territory at 39.9% below its 52-week high of $23.88. The stock is also in bull market territory at 55.3% above its March 13 low of $9.24.
This type of volatility is why it's important to learn how to read the daily and weekly charts and know where the key moving averages are. For Rite Aid, the only levels from my proprietary analytics are a weekly value level at $11.08 and a monthly risky level at $15.85.
The daily chart for Rite Aid
The daily chart for Rite Aid shows the formation of a golden cross on Dec. 6. This occurred when the 50-day simple moving average rose above the 200-day simple moving average. This buy signal was strange, as the stock traded lower until it reported an earnings beat on Dec. 19.
The stock gapped higher and surged 187% from $8.32 to $23.88 on Dec. 27. This certainly looks like a short squeeze to me. Rite Aid stock subsequently crashed by 59.5% to its March 16 low of $9.65. This low tested its 200-day simple moving average as a buying opportunity.
The stock spiked again to $19.93 on March 19 and then crashed again to $10.60, where it stayed above its 200-day simple moving average, now at $10.56. Its risky level for April is $15.85, as shown as the horizontal line.
The weekly chart for Rite Aid
The weekly chart for Rite Aid is neutral, with the stock above its five-week modified moving average at $13.53. The stock is well below its 200-week simple moving average at $50.23, which is also the "reversion to the mean," last tested during the week of Jan. 27, 2017, when the average was $133.50. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 37.23, declining from 38.11 on April 17.
Trading strategy: Buy Rite Aid shares on weakness to the weekly value level at $11.08 and to the 200-day simple moving average at $10.56. Reduce holdings on strength to the monthly risky level at $15.85 and to the 200-week simple moving average at $50.23.
How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.
Second quarter 2020 and monthly levels for April were established based upon the closing price on March 31. New weekly levels are calculated after the end of each week, and new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, while annual levels are in play all year long.
My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.
How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.
The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.
The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by gains of 10% to 20% over the next three to five months.
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.