Buy the Dip On This Struggling Retail Stock

Gap stock has pulled back to a historically bullish trendline

Managing Editor
Jun 4, 2018 at 12:10 PM
facebook twitter linkedin


Retail stocks have made headlines in recent weeks amid a flurry of earnings reports. While retailers like Dick's Sporting Goods (DKS) toasted impressive quarterly results, sector peer Gap Inc (NYSE:GPS) was not as lucky. GPS stock fell 14.6% after a subpar earnings report on May 25, pulling back to its 320-day moving average and a key Fibonacci retracement level. However, this could have bullish implications for the security, based on a previous signal.

In fact, over the past three years, there has been one other occasion where GPS has come within one standard deviation of its 320-day moving average after an extended stint above this trendline, according to Schaeffer's Senior Quantitative Analyst Rocky White. One month later, the security sported a whopping return of 31%.

A move of similar magnitude would put Gap stock around the $38 level for the first time since August 2015. At last check, the security was up 0.8% to trade at $29.22, after finding support around a 50% Fibonacci retracement of the rally from its July lows to its January highs. 

Daily GPS Chart 320MA Fib

Should Gap stock, in fact, charge back up the charts once more, a short squeeze could provide more tailwinds. Short interest increased by almost 10% in the most recent reporting period, and the 32.56 million shares sold short is the most since August. This represents nearly 14% of GPS' total available float and seven days of pent-up buying power.

Traders looking to speculate on the equity's short-term price action may want to do so with options, which are attractively priced at the moment. GPS currently sports a Schaeffer's Volatility Index (SVI) of 28%, which ranks in the 4th percentile of its annual range. This suggests that near-term options are pricing in relatively low volatility expectations at the moment, which could help maximize the benefit of leverage for premium buyers.

Bernie's Best Stock Bets for Summer 2021

1608308875

 




 
Special Offers from Schaeffer's Trading Partners