Stage 2 Breakout in AAP
Advance Auto Parts is a household name. If you’ve ever changed your own oil or replaced an alternator in the driveway, you are familiar with the company.
The weekly chart above outlines a quick stage analysis over the last 3 ½ years. After tripling in price from the 2020 lows to the peak of the 2021 bull market, AAP entered a severe Stage 4 decline.
Elevated material, labor and transportation costs forced Advance Auto Parts to cut its forecast and dividend last year. This, along with a dip in earnings, led to a significant decline in the company’s stock price. It fell 80% from a peak of $244 to a low of $50. This is typical in Stage 4 declines as most stocks fall 50-80%.
Following the selloff, AAP carved out a low over the next 9 months in a Stage 1 base. The share price oscillated in the $50-$70 range as long-term investors built positions in the beaten-down auto parts retailer. And we now know who was doing a lot of that buying.
On Wednesday it was announced that activist investor Daniel Loeb and his Third Point hedge fund reached an agreement with Advance Auto Parts for a stake in the company and three board seats.
Loeb takes a value-oriented approach and has a long history of turning around underperforming companies.
Loeb added 3 independent directors to the AAP board of directors effective immediately - Brent Windom, Gregory Smith, and Thomas Seboldt - all of whom have automotive and supply chain expertise.
Windom is the former CEO of Uni-Select, a distributor of aftermarket parts. Smith is an executive vice president at medical device company Metronic overseeing supply chains. And Seboldt spent most of his career with O’Reilly Automotive, one of the company’s main competitors.
The market seems optimistic about these changes, and AAP stock is now emerging from its Stage 1 base. Zooming in to a daily chart, we can see the shallowing action which took place over the last six months:
Notice the saucer pattern being formed as pullbacks got shallower and price action tightened up against the 200-day moving average.
The yellow resistance line at $75 was the line in the sand. This has been a major supply level where sellers have taken the opportunity to dump stock they mistakenly bought after the big drop in June 2023.
I have also drawn out the compression pattern - a pattern we often see in stocks as they absorb sellers and shares become concentrated in a smaller number of “strong hands.”
AAP now trades above both this $75 resistance level and its 200-day moving average - a key level watched by both institutional investors and systematic hedge funds.
The strength demonstrated by AAP over the last few weeks is undeniable. The stock is up 32% in 16 days on a big increase in volume. This is most likely the start of a new Stage 2 uptrend that should last from several months to a year or more.
How quickly AAP rises from here is unknown. But if the rally is real and this is in fact the start of a new Stage 2 rally, the stock should hold above its 50-day moving average and definitely the 200-day. A break below that is where the chart would sour and point to a failed move.
For this reason, I would placing a stop loss at $63.00, just beneath the 200-day moving average, for protection to risk 20% on the trade.
The weekly chart above outlines a quick stage analysis over the last 3 ½ years. After tripling in price from the 2020 lows to the peak of the 2021 bull market, AAP entered a severe Stage 4 decline.
Elevated material, labor and transportation costs forced Advance Auto Parts to cut its forecast and dividend last year. This, along with a dip in earnings, led to a significant decline in the company’s stock price. It fell 80% from a peak of $244 to a low of $50. This is typical in Stage 4 declines as most stocks fall 50-80%.
Following the selloff, AAP carved out a low over the next 9 months in a Stage 1 base. The share price oscillated in the $50-$70 range as long-term investors built positions in the beaten-down auto parts retailer. And we now know who was doing a lot of that buying.
On Wednesday it was announced that activist investor Daniel Loeb and his Third Point hedge fund reached an agreement with Advance Auto Parts for a stake in the company and three board seats.
Loeb takes a value-oriented approach and has a long history of turning around underperforming companies.
Loeb added 3 independent directors to the AAP board of directors effective immediately - Brent Windom, Gregory Smith, and Thomas Seboldt - all of whom have automotive and supply chain expertise.
Windom is the former CEO of Uni-Select, a distributor of aftermarket parts. Smith is an executive vice president at medical device company Metronic overseeing supply chains. And Seboldt spent most of his career with O’Reilly Automotive, one of the company’s main competitors.
The market seems optimistic about these changes, and AAP stock is now emerging from its Stage 1 base. Zooming in to a daily chart, we can see the shallowing action which took place over the last six months:
Notice the saucer pattern being formed as pullbacks got shallower and price action tightened up against the 200-day moving average.
The yellow resistance line at $75 was the line in the sand. This has been a major supply level where sellers have taken the opportunity to dump stock they mistakenly bought after the big drop in June 2023.
I have also drawn out the compression pattern - a pattern we often see in stocks as they absorb sellers and shares become concentrated in a smaller number of “strong hands.”
AAP now trades above both this $75 resistance level and its 200-day moving average - a key level watched by both institutional investors and systematic hedge funds.
The strength demonstrated by AAP over the last few weeks is undeniable. The stock is up 32% in 16 days on a big increase in volume. This is most likely the start of a new Stage 2 uptrend that should last from several months to a year or more.
How quickly AAP rises from here is unknown. But if the rally is real and this is in fact the start of a new Stage 2 rally, the stock should hold above its 50-day moving average and definitely the 200-day. A break below that is where the chart would sour and point to a failed move.
For this reason, I would placing a stop loss at $63.00, just beneath the 200-day moving average, for protection to risk 20% on the trade.
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