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Retailing giant Macy’s (NYSE: M) announced second-quarter earnings Wednesday, and the results were disappointing to investors. The company missed on the earnings and revenue estimates, and it lowered its forecast for the rest of the year.
The Macy’s earnings news led JPMorgan Chase (NYSE: JPM) analysts to downgrade the stock from a “buy” to a “hold.” By the end of the day, the stock price had dropped just over 5%.
Despite what seems like gloomy news from the fundamental outlook, there is some good news on the technical analysis side of the equation, especially from the weekly chart.
Looking at the chart for the last 3 ½ years, we see that Macy’s has been in an upward sloped trend channel that has helped dictate the stock price, which doubled during this time period. The selling that took place Wednesday took the stock down to its 52-week moving average. It also took the stock down to where the lower rail of the trend channel is just beneath the current price.
What I found most interesting about the stock hitting its 52-week moving average is what has happened before when the stock hit the trend line. We see from the blue circles that the stock has hit the moving average four previous times in the last 3 ½ years. Each time the stock has hit the trend line, it has reversed course and gained at least 20% in the three months that followed.
It is also worth noting that the 10-week RSI is in the same area that it has been in in each of the four previous instances when the stock was hitting its 52-week moving average.
The daily chart shows that the stock is oversold on both its slow stochastic readings and 10-day RSI. In fact, this is the first time in more than a year that the RSI has been in oversold territory.
The sentiment toward Macy’s is somewhat mixed. The short interest ratio leans toward the optimistic side, with a reading of only 1.30. The analyst ratings are more cautious, with 12 “buy” ratings, nine “hold” ratings and three “sell” ratings.
So, we have a fundamental picture that is a little shaky, a sentiment picture that is mixed and a technical picture that suggests the stock is set to bounce.
Based purely on the technical analysis, I like Macy’s at this point. I would look to buy it in the $63-$65 range and target a gain of at least 20% over the next three to four months.
Because the fundamental picture is so muddled, I would also take precautions and would set a stop-loss in the $60 range. This gives the stock some leeway in case there are more downgrades in the near term, and it keeps any potential loss to a minimum.
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