Chico's FAS Is In Flat Base, Awaits New Market Rally


The market situation has a lot to do with how a stock behaves.

About three weeks ago, this column discussed women's apparel and accessories retailerChico's FAS ( CHS ).

The market was in a confirmed uptrend, and Chico's had returned to its 10-week moving average for the first time after its August breakout.

The 10-week line can sometimes serve as a secondary buy area.

Volume was soft during the fall to the 10-week line, exactly what bulls want to see. The same morning that IBD's story came out, Chico's bounced off the 10-week area in volume 37% above average.

Let's say an investor bought shares at the noon price of 18.45. The stock rose modestly the next two sessions.

However, on Oct. 9, IBD's Market Pulse changed its market outlook to uptrend under pressure. On Oct. 10, the Pulse switched to correction.

Chico's returned to its 10-week line in soft trade, slipping as much as 3% under the hypothetical entry. The stock bounced off the line in weak volume last week but fell back to the 10-week line again.

Market corrections do that to stocks, even fundamentally strong stocks.

None of this action constituted a sell signal. Thanks to the modest moves and soft trade, you might regard the action as positive.

Something new emerged out of all this action around the 10-week line. Chico's is now working on the seventh week of a stage two, flat base. The stock could be setting up for something good.

If the market returns to a confirmed uptrend and the base is still intact, Chico's has a shot at a valid breakout.

Should that happen, aggressive buying would be more appropriate than what might be done in a secondary buy range.

Yet, if the stock breaks out during this correction, the prudent investor will stay on the sidelines. The odds are not good for any stock during a correction.

Chico's FAS has strong fundamentals. The EPS Rating is 95, putting it in the top 5 percentile. Sales + Profit Margins + ROE is an A.

The company has paid a dividend since March 2010. The annualized yield is 1.1%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Personal Finance , Investing Ideas

Referenced Stocks: CHS

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