Wait for Kohl's to Come Off the Discount Rack Before Buying

 | Apr 21, 2017 | 8:30 AM EDT
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The stock price of Kohl's (KSS) has been struggling for the past two years, but there is a little light at the end of the retail tunnel. Let's get out those coupons and go up and down the aisles of the charts and indicators to see if there are any positive clues we can glean.

In this daily vertical bar chart of KSS, below, we can see a number of price gaps or voids with heavy volume as investors and traders quickly run in or out the doors of the marketplace. There's a gap down in May, a gap up in August and November and a big gap lower in January. Some of these gaps were easier to anticipate than others.

The 50- and 200-day moving average lines have given a mixed to poor accounting of themselves as prices have swung above and below these trend-following tools several times in the past year. The daily On-Balance-Volume (OBV) line rose from May through December, confirming and supporting the price gains as investors traded (and bought) more shares on days when KSS closed higher. Since January the OBV line has trended lower, signaling that sellers of KSS have been more aggressive.

Looking ahead, we can see a bullish divergence between the lower price lows in January and March and higher momentum readings over the same time period. This means that the pace of the decline since December has slowed. A slower pace on the downside can mean that someone is stepping in to buy on weakness. This situation can sometimes foreshadow a rally.

A daily chart gives us one perspective on the price action, so it pays to look at longer time frames. Let's check the weekly chart below.

In this weekly chart of KSS, above, we can see that prices made a low in May/June last year and a possible retest of that low in March this year. Prices are below the rising 40-week moving average line and a rally above $45 would be needed to put KSS above that longer-term mathematical trend line. The weekly OBV line has moved up and down with the price action since mid-2016 and in recent months it has not made a new low when prices made a new low for the move down in March. This is a small bullish divergence and may not mean all that much, but it is worth watching. The trend-following Moving Average Convergence Divergence (MACD) oscillator is in a bearish mode below the zero line, but the two moving averages that make up the indicator are narrowing toward a possible cover-shorts buy signal.

In this Point and Figure chart of KSS, above, we can see the price action and reversals going back to 2013 without any price gaps. KSS has been in a range of $37 to $43 in recent months, and we would not have an upside breakout on this kind of chart until we trade at $44.

Bottom line: Retailers want to survive and thrive but they need to recreate themselves, and the same goes for some of their charts. KSS needs to rally above the 200-day moving average line and make a small breakout on the Point and Figure at $44. In addition, we need to see the OBV line turn up, telling us that buyers of KSS have become more aggressive. When we shop, we like to get 10% off or more. However, when looking to buy a stock, I would want to pay 10% more and be more convinced that the rally would continue.

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