Walk Into This Macy's Play

 | Jun 29, 2014 | 6:00 PM EDT  | Comments
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How do you gauge the technical health of a particular stock?

For myself, I first like to look at multiple time frames. A daily chart may look rather healthy, but there are times when a bullish trend on that chart is about to terminate because the bigger-picture pattern is bearish. So looking at the weekly chart is a good idea, as it can confirm whether anything is standing in the way of a daily-chart trend move.

Next, I like to evaluate the major moving averages. If I'm looking at the buy side of a stock, it is ideal for the price to be above the 200- and 50-day SMAs -- and the situation is even better if the five-day exponential moving average is above the 13-day EMA. A trade setup can still play out if this is not the case, as long as time and price parameters support it. However, my highest-probability setups all enjoy such support from the daily moving averages.

Lastly, a bullish stock will show a healthy pattern of higher highs and lows.

With all that in mind, let's take a look at the Macy's (M) daily chart -- which does show a pattern of higher highs and lows. The price is currently above both the 200- and the 50-day SMAs, and the five-day EMA is only slightly above the 13-day at the moment. (Note that the weekly chart on this stock is also bullish, so there is nothing standing in the way of a continued rally.)

Macy's (M) -- Daily
Source: Dynamic Trader

So what is the setup? Well, for our key level, we need to see a minimum of three Fibonacci price relationships that within a relatively tight range, as this indicates a key price support or resistance decision. For Macy's, this Fibonacci price cluster comes in at the $56.42-to-$56.96 area, which encompasses two 100% projections of prior declines, a 0.618 retracement of one prior swing and a 0.786 retracement of another. This, along with the swings I used to identify the cluster, is illustrated on the daily chart above.

Macy's' recent low was made at $57.03, which was just a touch above the price-cluster zone. As far as I'm concerned, this is close enough to call it a hit.

Bottom line: I would like to take any buy triggers in Macy's as long as the price continues to hold above the $56.42-to-$56.96 area. The initial upside targets for a move off this area come in at $61.24, $62.39 and then $63.01. A failure to hold above this same key area would prompt me to back off the buy side until further notice.

Please refer here for more information on trade triggers.

See here for general guidance on Fibonacci trade setups.

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