This Stock Offers a Well-Defined Trading Opportunity

November 13, 2017
By

Shares of automotive replacement parts specialty retailer AutoZone, Inc. (NYSE:AZO) are lower by about 25% year-to-date, but thanks to a multimonth rally, they are also well off their lows.

Headwinds are strong for specialty retailers in an environment where Amazon.com, Inc. (NASDAQ:AMZN) is seemingly ready to cannibalize many of these niches, but from a price perspective on the charts, AZO stock could look higher still if it can overcome one specific hurdle.

So you know, early this year Amazon.com announced that it would get into selling automotive replacement parts.

As you would expect, shares of automotive specialty stores like AutoZone, Advance Auto Parts, Inc. (NYSE:AAP) and O’Reilly Automotive Inc (NASDAQ:ORLY) immediately fell and despite the recent multimonth bounce through this lens remain trending lower.

AZO Stock Charts

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear weekly chart, we see that AZO stock for its part as a result of the year-to-date faltering by May snapped its multiyear up-trend line as well as its red 200-week simple moving average. Since then its 50- and 100-week (yellow and blue lines respectively) have begun to roll over and are all roughly coming together in the $650-$700 area, which will likely offer a heck of a lot of technical resistance.

In other words, for the time being AZO stock’s long-term chart is broken and it will take a herculean effort as well as time for this chart to turn back to long-term bullish.

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

However, and as I point out daily in this column, a multi-time-frame approach allows us to spot opportunities in different time frames and also gives us great perspective. Keeping the above chart in mind, the rally off the July lows in the bigger picture so far really only is a counter-trend move in a broken longer-term chart.

However, on the daily chart we see that AZO stock over the past few weeks has been in a consolidation phase just below the $610 area, allowing us to draw a simple black horizontal for reference. If and when AZO stock manages to break and hold above this area it could lead to a next push hither into the mid to high $600s.

The blue zone on the chart marks a still unfilled down-gap from May of this year. This gap would get filled around the $660-$670 area, which for this trade idea could also serve as a well-defined upside target.

Such gaps in charts often times are important tells about investor psychology in a stock and offer high-probability opportunities in all-time frames, including intraday.

So, should AZO stock manage to push and hold above the $610 mark on a daily closing basis it could open up into the mid to high $600s, where it then however would likely run into major technical resistance from the weekly chart above.

— Serge Berger

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Source: Investor Place



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