Traders Stand Behind Retail Sector

There is a clear sign of hesitation from traders in the options pits

Jan 28, 2020 at 11:51 AM
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Over the last few weeks in this space, we have taken a hard look at retail giant Walmart (WMT) and the chart levels traders should be watching. This week we're not venturing too far from this, taking a closer look at the retail sector as a whole, since we're not only coming off the holiday season, but some surprising trends in the space have encouraged us to take a more thorough assessment. To be more specific, we wanted to examine the chart and general sentiment for the sector's main exchange-traded fund (ETF), the SPDR S&P Retail ETF (XRT). (As a reminder, XRT still holds "traditional" retailers as its top holdings, including names like GameStop (GME) and Macy’s (M), for those wondering about any type of "Amazon effect.")

From a strictly anecdotal perspective, an assumption may have been made that the setup for the retail sector broadly speaking was bearish. Those who stay current on financial news have to be familiar with the constant headlines surrounding a "retail apocalypse" and a staggering number of store closings in 2019. What's more, we've also been greeted with plenty of "disappointing" holiday sales figures from major retail names, including Target (TGT) and L Brands (LB), likely giving many a "bad feeling" about the state of the retail sector heading further into 2020. (Of course, more astute followers will remember that December retail sales as a whole turned out to be rather strong).

So it may come as a surprise to many that XRT's technical footing actually appears quite sturdy at the moment. Indeed, the ETF is currently trading above all major moving averages, with the daily chart in particular promoting a feeling much closer to optimism than concern. Of note, the closely observed 50-day moving average has proven to be strong support in recent months, and the 200-day moving average (which was good support in October and November) has started to flatten out in recent months. Plus, XRT notably broke through long-term resistance at the 320-day moving average at the end of 2019.

There's more we can add to the picture for XRT's chart. Taking a broader view, the ETF is holding right near the year-over-year breakeven point and the $44-$45 region -- the latter of which equates to a 50% Fibonacci retracement of the 2018 highs and August's six-year low. A trendline connecting XRT's recent string of higher lows also lands in this area, signifying that the ETF seems to be sitting on solid footing for the time being, hinting that the path of least resistance may in fact be to the upside.

Then there's the data from that shows net outflows for XRT to be just $8.36 million so far in 2020. "Just $8.36 million?" you may be asking. To put this number in perspective, one should consider that at this point in 2019, outflows on XRT were at more than $251 million. And back in 2018, outflows on XRT surpassed $300 million by this point in January. Despite the prevailing narrative of a dying (or at least evolving) retail space, investors seem to be mostly sticking behind XRT, suggesting relatively stable conditions surrounding the ETF.

To that extent, we clearly see signs of hesitation from traders when looking at the options pits. Peak open interest on XRT is at the March 48 call, where more than 29,000 contracts reside, dwarfing the fewer than 12,000 contracts at the next most-populated option. A large chunk of these calls were sold to open, so these call writers see a ceiling ahead for the retail-tracking fund.

xrt stock jan 24

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 26.


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