6/15/2011
By Brian Sozzi, Research Analyst

Amidst a continued weak tape, I have decided to put my chartist hat on to see where the dreaded head and shoulder pattern has (a) fully formed and the stock violated the neckline; or (b) the pattern is about to fully form, which means the neckline could be pierced.  Note that I am talking about the head and shoulders top formation not the inverse head and shoulders that tends to signal a potential upward reversal in a stock price.  This latest undertaking was done to add a few more shorts to the model portfolio given the broader market's less than confidence inspiring volume on up days and equally as lackluster economic data reads.  No surprise that most of the names on the list below are cyclicals.

(A hardcore chartist pays no homage to fundamentals, but since I study earnings reports, macro news, and meet with teams all day I couldn't help but to provide some background commentary.)

Fully Formed Head and Shoulders

Bebe (BEBE)
Fundamental story has been improving, sparking some sell-side analysts to issue upgrades recently.  Mr. Market may have sniffed out the high level of discounting at the stores and building inventories, not to mention rationalizing the pullback in discretionary consumption of late.

Kohl's (KSS)
Based on my store tours, high inventories and elevated markdowns have created margin risk for the second quarter.

Macy's (M)
Seeing support for the stock relative to the gap up in response to the news that surrounded the 1Q11 earnings release.  However, a mini head seems to have formed in the middle part of May, with the neckline pierced on June 2.

Rounding into Form

Furniture Brands (FBN)
Fundamentally flawed business model and slowing furniture demand are not good combinations.

Buckle (BKE)
Teen apparel land is currently very promotional and is battling receipt inflation, creating margin uncertainty.  The head on Buckle appears to have fully formed by June 3, but support was found around the neckline, though on weak volume, which is not a positive indication.

Activision Blizzard (ATVI)
Industry data (which does not include digital revenues) has been weak, and with a void in the company's release slate until Call of Duty hits this holiday season, sentiment may be souring near-term.

Brian Sozzi
Wall Street Strategies

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