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Ask The Trader
Wednesday, January 10, 2001

Reviewing Retailers

How does Wal-Mart look here and do you expect it to outperform as Greenspan cuts rates?

The Bentonville, Arkansas based retailer headed for the moon as soon as the Fed announced its decision to cut interest rates. Since then, Wal-Mart (WMT) has settled back on worries that one cut is not enough and that the U.S. economy may be in for a protracted recession. Wal-Mart and the rest of the retailers should eventually benefit from further rate cuts, but they first have to battle through a tough first-half of 2001 that should show that consumers have cooled their spending habits. As usual, we will let the charts show us when retailers are starting to see longer lines at the checkout counters.

Turning to Wal-Mart's daily chart, we can see that a bullish inverse head and shoulders formation was just completed. The bad news for WMT investors was that it was broken just two trading days later. We are now looking for the stock to hold trend line support until the Fed cuts rates again, which should act to turn the tides to the buy side for many of the retail stocks. If we see further weakness in the retail sector, the final line of support comes in at $47. This level has proven to be an area where large buyers have stepped up to the plate throughout the last year. If weakness continues within the retail sector, the best we can hope for is some tradable bounces in WMT between $47 and $57 over the next quarter. On the upside, a break above the neckline at $55 would confirm strength in WMT and mark a good entry point after another rate cut.

What is your near term outlook for BBY?

Best Buy (BBY) is currently at an important crossroads according to its daily chart. The stock has formed a near textbook flag formation. After a quick bolt higher (flag pole), stocks often pause to digest their disproportionate gains. This pause is what forms the flag and ideally it should come on lower volume, as the stock gears up for its next run. In Best Buy's case, the top of the flag also coincides with strong resistance. Herein lies the crux of BBY's ascent. If it can convincingly conquer resistance at $40, the stock will probably continue to fill the gap created when the stock tanked on 11/09/00. If resistance proves to be too strong, the stock may very well settle back into the base created in November at the $32 level.

Good Luck and Have a Profitable Trading Day

Craig Seidler
Assistant Editor


Copyright 2001

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