Is History Repeating Itself at Kroger?

 | Mar 19, 2017 | 2:00 PM EDT
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(This article originally appeared at 8:30 a.m. Friday on Real Money Pro, our premium site for active traders. Click here to get great columns like this from Ed Ponsi and other writers.)

In a strong bull market, with indices near their all-time highs, you have to dig a little deeper to find good setups. Much like Elvis, the more popular names have already left the building.

So, like a shopper at a clearance sale, you sift through the remaining items to see if anything strikes your fancy. Then you spot it, a solid setup on supermarket chain Kroger (KR) .

Kroger has fallen by about 15% over the past three weeks. The stock's downward spiral began around March 2, after the company reported a decline in same-store sales growth. It was Kroger's first quarterly drop in same-store sales in more than 13 years. Kroger cited food deflation as one reason for the disappointment.

The company is also facing renewed competition from Walmart (WMT) and Target (TGT) , which are becoming increasingly competitive on price. Other chains, such as Aldi, are working their way into Kroger's territory, which mainly consists of the Midwestern and Southern U.S.

Technically, Kroger is now bouncing from a support level that formed in October. At that time, the stock traded briefly below $29 before taking off on a sharp rally, gaining about 25% in less than three months (point A). After the stock's recent decline, it found support in that same price area (point B).

It's also worth noting that Kroger's last big rally was kicked off with a buy signal from its RSI (relative strength index) indicator, which occurred on Oct. 6 (point C, green). No other RSI buy signals have occurred on the stock since then, until yesterday (point D).

Source: TradeStation

What should be our objective for this trade? The next significant level of resistance for Kroger is $34 (point E), as it's the starting point of the stock's recent decline. Assuming an entry of approximately $29, that would represent a potential gain of about 17%. Aggressive traders could shoot for the stock's December high at $36 (point F), which would represent potential upside of about 24%.

History does not always repeat itself in the markets, and prices have no memory. Not every price or event has significance, and coincidences do occur. While this setup has a satisfying symmetry to it, it is no more or less likely to work than any other setup. If the price falls significantly below support at $28.75, then there is no reason to hold on to the trade.

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