Target Stock Gaps Higher on Earnings Beat

Big box retailer Target Corporation (TGT) beat earnings estimates on Aug. 19, and the stock gapped higher. The high on Aug. 20 was $156.10, which is the stock's all-time intraday high. The weekly chart is positive but overbought, with Target in an "inflating parabolic bubble" formation.

The stock closed last week at $153.63, up 19.8% year to date and in bull market territory at 70.4% above its April 3 low of $90.17. Target has now beaten analysts' estimates in six consecutive quarters. Its P/E ratio is 21.97 with a dividend yield of 1.76%, according to Macrotrends.

The daily chart for Target

The daily chart shows that Target had a bear market decline of 30.7% from a high of $130.24 set on Dec. 20 to the low of $90.17 set on April 3. The stock then rallied by 73% from this low to the all-time intraday high of $156.10 set on Aug. 20.

There was a fake death cross formation on April 6, when the 50-day simple moving average (SMA) fell below the 200-day SMA. This was reversed on June 15 with a golden cross when the 50-day SMA rose back above the 200-day SMA. During the decline, shares of Target failed to hold the annual pivot at $111.21 on Jan. 15. This led the stock to its April 3 low on $90.17.

From the V-shaped bottom, the stock returned to its annual pivot on April 17. From its June 15 golden cross, the stock moved higher, and when the third quarter began, the quarterly pivot at $121.46 became a magnet on July 13. Holding this level was key to the strength to the Aug. 20 high of $156.10.

The weekly chart for Target 

The weekly chart for Target is positive but overbought, with the stock above its five-week modified moving average of $135.69. The stock is also well above its 200-week SMA, or reversion to the mean, at $82.84.

The 12 x 3 x 3 weekly slow stochastic reading is projected to rise to 93.31 this week, up from 92.38 on April 21. The reading above 90 puts the stock in an "inflating parabolic bubble" formation, which is a warning to reduce holdings.

Trading strategy: Buy Target shares on weakness to the quarterly, annual, and semiannual value levels at $121.46, $111.21, and $104.99, respectively. Reduce holdings on strength to Aug. 20 high of $156.10.

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 level uses the last nine closes in these time horizons.

The third quarter 2020 level was established based upon the June 30 close, and the monthly level for August was established based upon the July 31 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 "too cheap to ignore," which is typically followed by a gain 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.