Sears – Bruised, Battered, and Short Squeezed

Mar 13, 2008: 5:49 PM CST

Sears Holding (SHLD) has taken a severe punishment from investors since 2007, falling from an all-time high above $190 to a recent three-year low beneath $90.

While the chart itself is educational from a trend and retracement perspective, I wanted to highlight a few points during the decline.

First, there were two significant events that occurred on the daily chart that are worth viewing:

As price crested lower, a major report in late November caused a $20 point overnight gap which resulted in a hammer-style candlestick on massive volume (thought to be selling volume, but it was actually short-term accumulation).

Retail traders and investors who sold here (after a depressing investment) were shocked to see the stock recover its full value prior to the overnight gap-down drop which forced many to sell. Savvy traders knew that the odds seem to favor that the gap would have closed, rather than not, and could have played price up (to close the gap) and down (due to the pullback to resistance via the 20 period moving average, combined with bearish candlesticks and overbought oscillator readings). There almost was a powerful evening star candle, and certainly a bearish engulfing pattern at key resistance.

Second, not to be outdone, yet another $10 gap occurs in mid-January, which also resulted in a fill. However, this time it was the short-sellers who got their accounts cleaned instead of the buyers. The fact that Sears was in a strong downtrend, and had deteriorating fundamentals due to weaker retail sales was clear to virtually everyone. Newer (and even experienced) traders and funds were certainly short this stock (or sector). I’m sure many of them were counting their profits following this overnight gap and subsequent price weakness, but they woke up the morning of January 22nd to find a massive short-squeeze and buying frenzy on their hands.

Those who held short into the next day experienced a two-day price move greater than $25. Traders who opted to be aggressive and buy to fill this gap similarly found their accounts higher than before.

The fact is that the market often acts to confuse the majority most of the time. In late November, the price gapped down beyond fair valuation and immediately corrected over the next week, shocking those who ‘got short’ due to the poor news.

Subsequently, price shocked the shorts with a massive squeeze, triggering all but the aggressive stops and pulling away those positions. When the dust settled, the market then turned around back to the downside and shocked the new buyers and ‘bottom fishers’ who thought they had found retail gold with this stock. While price has not yet made a new low, it does continue its downtrend, leaving buyers at the late January and early February levels quite underwater.

Let’s peek quickly at the weekly chart to gain the broader perspective on this move (red arrows indicate key resistance levels, and opportune short-selling trade entries):

Notice the massive momentum divergence which set up in the middle of the chart. The subsequent breakdown in price beneath the key moving averages and out of the channel trendline formation signaled that the impetus had shifted from the bulls to the bears. The large price decline in early June signaled the official end to the uptrend and birth of the new downtrend (and position trade short entry).

Other pullbacks (including one key massive short-squeeze week in October 07) served as further entry points to the short side.

Notice that the $20 point move in late January 2007 took price to the falling 20 week moving average, almost like “magic.” Price inflected against this level and has continued its descent lower.

There are many other lessons to be learned in the chart and technical picture of this stock. I recommend annotating it for yourself and seeing what insights you can glean from the fall of this massive retail giant.

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