Macy’s Inc (NYSE: M) recently delivered a huge Q2 earnings beat that sent shares surging 17 percent higher. For Macy’s shareholders, the earnings report looked like the positive catalyst they had been waiting for for over a year. Unfortunately, after just three days, the rally completely fell apart.
After jumping from $34 to nearly $41 following earnings, Macy’s traded down in 8 out of the next 11 sessions and gave up 11.7 percent from its highs. One possible explanation for this surprising turnaround is that traders that have been shorting Macy’s since the $71 level in mid-2015 were scared into covering.
Macy’s Q2 was likely good enough to send shorts running for the hills. As a result, Macy’s share price have gotten temporarily squeezed a bit higher than it deserved to be.
While it’s not unusual for a pullback to follow a huge breakout, Macy’s shareholders are likely disappointed by this pullback’s magnitude. The post-earnings spike sent the stock above its 200-day simple moving average (SMA) for the first time in a year. However, within a matter of weeks, it had dipped back below.
Macy’s stock may be in the process of completely filling the earnings gap it formed. If that’s the case, the stock could be headed below $35 in coming days.
If you’re a Macy’s shareholder, don’t give up just yet. Depending on how the next several weeks play out, the stock could still be in the middle of a positive technical move.
First, gap fills are typically about consolidation rather than a change in trend direction. In other words, once Macy’s closes that earnings gap, there’s a good chance it could turn bullish once again.
Second, even though the $40.98 high was short-lived, the post-earnings move represents the third consecutive higher high the stock has made since its May bottom. If it bounces before it hits $31, it will form another higher low as well.
Third, if Macy’s resumes its uptrend in the near future, it will likely form a golden cross in which its 50-day SMA crosses above its 20-day SMA. This formation is often an indicator of the beginning of a long-term uptrend.
Finally, it seems clear following Macy’s post-earnings surge that the stock has broken above the bearish resistance line that has been in place for over a year.
Macy’s trading action in the past couple of weeks may be disappointing, but it shouldn’t be cause for alarm just yet. The stock is still up 9.2 percent in the past three months, and it may simply be laying the technical foundation for a major move higher in the months ahead.
Disclosure: the author holds no position in the stocks mentioned.
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