Target Beats on Earnings, but Stock Peaks Anyway

Big box retailer Target Corporation (TGT) beat earnings estimates on May 20, extending a winning streak to five consecutive quarters. The stock was on a strong momentum run-up that peaked at $125.97 on May 19. This indicates that good earnings news was priced into Target's rally. The stock ended last week below this week's risky level at $120.09.

Target stock closed last week at $117.49, down 8.4% year to date and 9.8% below its all-time intraday high of $130.24 set on Dec. 20. The stock is also in bull market territory at 30.3% above its April 3 low of $90.17. Target has an elevated P/E ratio of 21.52 and a dividend yield of 2.22%, according to Macrotrends.

The daily chart for Target

Target stock had been above a golden cross since May 8, 2019. A golden cross occurs when the 50-day simple moving average rises above the 200-day simple moving average, indicating that higher prices lie ahead. This tracked the stock to its all-time intraday high of $130.24 set on Dec. 20.

Note that the stock gapped higher on Aug. 21 and Nov. 20, 2019, on positive reactions to earnings. Once the high was set, the stock began to cascade lower. Target fell below its 50-day simple moving average on Jan. 15. The stock held its annual value level at $111.21 on Jan. 31, rebounded to $118.88 on Feb. 21, and then broke below $111.21 on March 3.

The 200-day simple moving average was a magnet between Feb. 21 and May 4. In between, Target stock tested its semiannual value level at $92.91 as a buying opportunity between March 12 and April 6. Between April 17 and May 7, the annual, quarterly, and monthly pivots at $111.21, $112.43, and $113.68 were magnets. After the stock peaked at $125.97 on May 19, it ended the week below the weekly pivot at $120.09.

The weekly chart for Target 

The weekly chart for Target is positive, with the stock above its five-week modified moving average of $112.03. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $78.86.

The 12 x 3 x 3 weekly slow stochastic reading ended last week rising to 72.28, up from 65.16 on May 15. At the December high, this reading was above 90, putting the stock in an "inflating parabolic bubble" formation. This was a signal to book profits.

Trading strategy: Buy Target shares on weakness to the monthly, quarterly, and annual pivots at $113.68, $112.43, and $111.21, respectively, and reduce holdings on strength to the weekly pivot at $120.09.

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.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and 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 as being "too cheap to ignore," which typically is 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.