We’ve gotten a few questions about the stock, Spencer’s Retail Ltd., since it rallied more than 50% over the last few weeks on news of a large shareholder building a position.
The question now is, can this run continue and how do we define our risk if involved in the stock?
Let’s take a look.
The stock fell roughly 75% from its post-IPO highs to its August low near 56 where it began finding some meaningful demand. Prices tried to break back above resistance near 90 and failed, pushing the stock back towards the low 50s where the recent reversal began.
What provided clues that a reversal may have been ahead was the fact that momentum was making higher lows despite the lower low in price, signaling exhaustion from sellers and helping spark this rally back up towards the top of its 8-month range.
Click on chart to enlarge view.
There is no doubt that this is a bearish to bullish trend reversal, but the question now becomes how do we manage our risk on the long side and skew the reward/risk in our favor?
Whether you’re the classical pattern type and using the “double bottom” pattern to trade this, or simply using support/resistance and the concept of polarity, the level remains exactly the same. As long as prices are above 90 then this breakout is intact and we can be long.
Below that, there’s too much downside risk towards 60 and opportunity cost as well so we do not want to be involved. With that said, if prices are above 90, then we can own Spencer’s Retail Ltd.
In terms of price objectives, our first is at the 61.8% Fibonacci Retracement of its 2019 decline (160), but given the long-term nature of this trend reversal the prospects of this trading back toward its all-time high of 225 are high.
Let’s take it one step at a time though and reevaluate as the data comes in.
Overall, this trend reversal is one worth paying attention to. If you’re trading it, 90 is our line in the sand for risk management purposes.
Thanks for reading and let us know if you have any questions!