Kohl’s (KSS), India (EPI) – How To Read The Stock Charts

We’re going to attempt something of a lesson in stock-picking today using two moves that couldn’t be any more different and whose respective charts over the last six months have been completely at odds with each other.

The goal is to show that at any given moment the market will offer us a variety of ways to make money, and, indeed, this week we’re going to try to make a bit’o’the green using two distinctly different strategies.

But first, here’s a short backgrounder to help you better understand our thinking on both initiatives.

We start with a discussion of the American greenback.

  1. USD

The buck has been extraordinarily strong for coming on nine months, and that’s taken a toll on U.S. exporters. That said, a strong USD has also had a constructive effect on American financial assets, as the rising buck has made it doubly attractive to own equities here, particularly in domestically oriented companies with strong growth trajectories.

Here’s the USD for the last two years –

DXY-Weekly-Chart

Though companies doing business overseas have suffered from weaker export numbers – and from the reduced value of their repatriated earnings – a number of domestically oriented businesses have fared much better, as we’ll show you below.

  1. Savings Rate

A general pickup in employment conditions along with continued, albeit mild economic growth also means the consumer is once again beginning to show signs of life – not in every jurisdiction, to be sure, or at every outlet, but there have been some remarkable gains to be had in retailers like Urban Outfitters (NASDAQ:URBN) and Kohl’s (NYSE:KSS), to name just two, where stock returns have surprised formidably over the last few months.

We’ll return to Kohl’s in a moment, but before we do, have a gander at the following chart of the savings rate, which has been rising strongly ever since Jack and Jill Mainstreet began pocketing their gas savings rather than spending it –

US-Savings-Rate

The savings rate has now returned to long term average levels last seen some four years back, prior to tax changes that knocked the series lower in late 2012. We’re now at levels where consumer spending typically begins to gain momentum. Any wage gains in the pipeline will also catalyze consumers to spend more time (and money) at the mall.

For companies like Kohl’s, of course, additional spending would be gravy. As mentioned above, numerous retailers have already been beneficiaries of strong investment flows, as the chart below demonstrates.

NYSE-KSS-Volume

This is Kohl’s for the last six months, but any number of other retailers could have been easily substituted.

And what does the chart tell us?

First up, remember the market is a discounting mechanism before anything else. It takes all available information, and sometimes efficiently, sometimes less so, projects the value of a company anywhere between three to twelve months down the road.

Kohl’s Business Prospects are Solid

Investors apparently see strong prospects for Kohl’s, a department store that sells household items and apparel to average consumers at its 1200 outlets all over the continental U.S.

That said, could it be that the best of what’s to be gained from an investment in Kohl’s is already priced into the stock? Are we going any higher from here in the near term?

Our reading of the technicals says no.

To begin, a nearly 50% gain over the course of five months should give everyone pause (in red).

And while it’s true there’s no sign of a volume blowout that usually accompanies tops (in blue), we’re wary of the action in both the RSI and MACD indicators (in black), the former of which has been at or above severely overbought levels four times in the last eight weeks, and the latter of which has already begun descending towards its midway waterline, that threshold level which generally marks breaks between bullish and bearish activity in a stock.

Look now at a longer term chart of KSS –

KSS-Weekly-Chart

This is the weekly paste-up for Kohl’s for the last three years, and it clearly supports our view that any coming gains for KSS shareholders will be muted – if they come at all. We’re basing this on the inevitability of an overbought weekly RSI read (in red), should the stock continue any higher (+80 is considered extreme, particularly in a weekly chart).

Should that ensue, it would almost certainly trigger an avalanche of technical selling that would cap the stock in the $80 range and make a quick and easy profit for those who sold near term CALL options at that level.

And that’s precisely what we’re doing for our first trade –

[mepr-rule id=”994″ ifallowed=”hide”][mepr-unauthorized-message][/mepr-rule]

[mepr-rule id=”203″ ifallowed=”show” description=”wall_street_elite_members_only”]

Wall Street Elite recommends you consider the sale of the KSS May 80 CALLs for $2.20 each.

[/mepr-rule]

[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]

Wall Street Elite recommends you consider the sale of the KSS May 80 CALLs for $2.20 each.

[/mepr-rule]

Taking the Opposite Tack

We move now from Menomonee Falls, Wisconsin, where Kohl’s is headquartered, to the Indian sub-continent, where we see the possibility for Kohl’s-like gains in Indian equities in the very near term.

Before we have a look at the charts, however, consider –

India’s commitment to economic reforms looks deadly serious. Since taking power early in the year, the country’s new leadership has initiated tax reforms and launched a genuine bid to develop the country’s industrial infrastructure, including expanding the electricity grid, upgrading roads, ports, rail lines and sanitation networks, all in a bid to become the world’s next great manufacturing hub.

And the market appreciates this, as the chart below shows.

NYSE-EPI-CHART

The weekly chart for the Wisdom Tree India Earnings ETF (NYSE:EPI), the biggest India fund on the market, shows a break above resistance directly after new Prime Minister Modi was elected (red arrow). The chart also shows an inability to maintain those gains over the last month (in blue). But were not yet worried, because the sideways action of the last year has served to ease an untenable overbought condition that was established in May of 2014 (red circle), bringing both RSI and MACD indicators into cooler waters, hovering just at or above their respective waterlines (in green).

The daily chart also offers hope. Look here –

NYSE-EPI-ASCENDING

Most important is the ascending triangle, considered by chartists to be a ‘continuation pattern’ (in red). A break above former highs at $24.37 would engender an immediate technical buy on the stock and very likely send it appreciably higher.

RSI is also helping, with its break above its waterline late last week (blue box). MACD is less than a week from confirming.  So how to we profit from this?  Here’s what we’re doing…

[mepr-rule id=”994″ ifallowed=”hide”][mepr-unauthorized-message][/mepr-rule]

[mepr-rule id=”203″ ifallowed=”show” description=”wall_street_elite_members_only”]

We’re initiating a speculative CALL purchase today on the stock.

The Kohl’s are cold today, friends – and the sub-continent’s rising!

Wall Street Elite recommends you consider 1) the KSS CALL sale outlined above and 2) the purchase of the EPI October 24 CALL for $1.15

[/mepr-rule]

[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]

We’re initiating a speculative CALL purchase today on the stock.

The Kohl’s are cold today, friends – and the sub-continent’s rising!

Wall Street Elite recommends you consider 1) the KSS CALL sale outlined above and 2) the purchase of the EPI October 24 CALL for $1.15

[/mepr-rule]

With kind regards,

Hugh L. O’Haynew

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.