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
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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.

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