Conventional retail stocks have struggled recently, but there were a few bright spots. Best Buy Co., Inc. (BBY) was one of them. Since the early 2016 low at $25.31, the stock had rallied 150% to a high of $63.32 in late August. Now, even that is starting to change. Rite Aid Corporation (RAD) is at the other end of the spectrum, having lost more than 70% of its value since January. Rite Aid has not quite broke through support yet, but if it does, it will signal another drop for the beleaguered drug store chain.
Shares of Best Buy fell 8% on Sept. 19 to $52.76, closing below support of $52.97. The close below support completes a small head and shoulders topping pattern, likely signaling lower prices to come. This does not mean that the price can’t wiggle around a bit, but with three recent failures to hold above $62 and then a significantly lower swing high in September, the odds favor further selling before a significant rally. The head and shoulders pattern is about $10 in height, which subtracted from the breakout price gives an estimated target near $43. Best Buy has also dropped to just below the rising trendline that extends back to mid-2016. (See also: Is Best Buy Amazon-Proof?)
There is the possibility that this downside breakout could be false and that the price will ultimately bounce off the rising trendline. Traders who are still bullish on Best Buy could buy the stock if the price starts rallying back above $55 or $56. In that case, stop-loss orders could be placed just below $52, as there are still a lot of negatives occurring in the industry and traders should protect against the associated downside.
Rite Aid stock has posted a nearly vertical decline in 2017, falling more than 70% off the January high ($8.77). On Sept. 19, the stock fell 12.09% to close the day at $2.40. Since July, the stock has been hovering above support at $2.21. Given the recent failure to hold above resistance at $2.77 (the July 19 swing high), if the stock drops below $2.20, it could be in for another wave down. The height of the range, $0.59, can be subtracted from the breakout price to give a target of $1.61. (For more, see: The Top 5 Rite Aid Shareholders.)
The price has not yet broken lower. It could continue to range for some time or break out above $2.80. Since this is a very strong downtrend, it is technically better to wait for a rally and a higher low to form before buying. In other words, traders should wait for at least a short uptrend to present itself instead of trying to pick a bottom. As the big decline and rising volume on Sept. 19 showed, there is still a lot of selling pressure in the stock.
The Bottom Line
Best Buy was doing well, but it just broke below a technical level indicating a reversal. The stock is still very close to that breakout level, so a rally is possible (implying a false breakout). However, given the overall climate in the sector, caution is certainly warranted on the long side. Meanwhile, the downtrend in Rite Aid shares is still in effect, and a significant drop on Sept. 19 brought the price back toward support. A breach of support indicates another swing down in the downtrend. Longs should be very cautious here. Whether long or short, traders should consider the use of a stop-loss to help control risk. (For additional reading, check out: Technical Analysis: The Use of Trend.)
Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the stocks mentioned.