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Trading Techniques: Favorable Same-Store Sales Report

Trading Techniques: Favorable Same-Store Sales Report
April 15
17:44 2012

Day traders and short-term traders are constantly seeking techniques that exploit certain predictable patterns in equity price movements. Significant business events, while important to fundamental traders, can also produce consistent stock price patterns. The favorable same-store sales report is one such event.

Retailers report same-store sales (sometimes called “existing store sales”) on a monthly or quarterly basis. In most cases, “same-store” refers to stores that have been open one year or more. This permits a comparison of financial performance that ignores expansion. After all, if a retailer has increased its total store footprint by 15% in the past year, a 15% increase in revenue is not much of an accomplishment.

This particular pattern is relatively weak, with a bull market breakeven failure rate of 20% and a bear market breakeven failure rate of 27%. (Anything above 20% is considered a poorly-performing pattern.) The average price increases are 23% in bull markets and 14% in bear markets. For these two reasons, this pattern is best exploited only in a bull market. Also, this pattern occurs most often as a continuation of an uptrend, but it performs better when it occurs as a reversal.

What generally occurs is that the stock jumps on the announcement of positive or better-than-expected same-store sales, tops fairly quickly, and then falls again.

When same-store sales are announced, watch stocks with positive reports for upward price gaps on the day of or after the announcement. If no gap occurs, this pattern has not formed and you should not trade the stock on this basis. Calculate the price target by taking the difference between the intraday high and the intraday low and multiplying it by 0.82. Add the result to the announcement date intraday high.

The breakout is signaled when the stock closes above the announcement date intraday high. Once the upward break is confirmed, take a long position. Exit at the target price, which is likely to come quickly—44% will peak in under two weeks in a bull market (which, if you were paying attention, is the only time you should trade this pattern!). Over a quarter (about 29%) will make a long-term upward move that exceeds 70 days, so the long position is relatively safe.

If you do indeed see a gradual reversal once the target price has been reached or exceeded, you may consider shorting the stock, which is a more aggressive play. Typically this reversal will return to the breakout price, and you should not remain in the short position past that point.

Should the pattern fail, it will typically do so shortly after the upward breakout. For an increase of no more than 5% past the breakout, the subsequent fall should be at least 20% and possibly as much as 27%. For this reason, you may choose to short the stock in the event of a pattern failure to recoup your losses from the long position and take profits from the decline.

One final word on this pattern relates to follow-on announcements. In many cases earnings announcements will come shortly after same-store sales are released, and depending on the results and the timing, the earnings announcement may override any lingering impact of the same-store sales results.

Always remember that short-term trading requires discipline to be successful. Don’t let greed tempt you into remaining in a position too long, or you may find yourself losing all of your gains and more.

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