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Trading Techniques: Unfavorable Same-Store Sales Report

Trading Techniques: Unfavorable Same-Store Sales Report
April 24
22:55 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 unfavorable 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 26% and a bear market breakeven failure rate of 27%. (Anything above 20% is considered a poorly-performing pattern.) The average price declines are only 12% in bull markets and 14% in bear markets. For these two reasons, trading this pattern is not strongly recommended.

What generally occurs is that the stock falls on the announcement of negative or worse-than-expected same-store sales, rebounds weakly in the short term, and then falls again over the longer term.

When same-store sales are announced, watch stocks with negative reports for downward 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 0.68. Subtract the result from the announcement date intraday low.

The breakout is signaled when the stock closes below the announcement date intraday low. Once the downward break is confirmed, take a short position. Exit at the target price, which is likely to come quickly—60% or more will bottom in less than two weeks in a bull market and 57% in a bear market.

Should you see a brief dead cat bounce once the target price has been reached or exceeded, you may consider taking a long position in the stock, but this is a more aggressive play. The duration of the rise is unpredictable (though usually short) and the bounce is not likely to be substantial. Do not look for anything higher than the breakout price.

This pattern is more difficult than many to play should it fail. Your best bet will be to exit your position and minimize your losses as best you can. Predicting subsequent price movement is tricky and will probably subject you to further losses.

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. Also, negative same-store sales reports are often followed by another negative report, so watch the calendar to see what takes place at the next monthly or quarterly report.

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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