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How to trade retail stocks during GameStop's short squeeze surge, according to two traders

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How to trade retail stocks during GameStop's short squeeze surge

GameStop soared again Monday, up more than 140% at the day's peak.

Those wild swings also drove retail stocks higher. The equal-weighted XRT retail ETF, which holds GameStop, climbed to an all-time high during the session – it also had a volatile day, ending up nearly 2%, but paring a 10% gain from earlier.

"You have to be aware of the volatility," Ari Wald, head of technical analysis at Oppenheimer, said of GameStop's rally on CNBC's "Trading Nation" on Monday. "This is for casino money only. If you get excited about being in this type of stock that everybody's talking about and that it could be up or down 50% in a matter of minutes, fine, but you have to understand that it can easily be lost."

GameStop has likely been caught in a short squeeze – its high short interest sets off a cycle where any gains force short investors to cover their positions, thereby sending the stock even higher. An influx of retail trading has also been credited to its rise.

"If you find yourself long GameStop, I think you take your profits and run and, you know, maybe revisit your thesis in a few months. I think if you find yourself short GameStop, I don't know what you're doing," Quint Tatro, president of Joule Financial, said during the same interview.

Instead, Tatro prefers more consistent players in the retail space, such as Walmart and Kroger. He applauds Walmart's e-commerce strategy and exposure to the grocery market; for Kroger, he says its moves into the grocery delivery business are a plus. Even so, the rally in retail stocks has him pressing pause for now.

"When this group pulls back, which I think that [it] will, then you've got opportunity to buy some value," he said.

Kroger has risen 9% so far this year, while Walmart is up 1%.

Wald also sees opportunity in the retail space, outside of volatile names such as GameStop.

"We prefer something less extended like an Overstock.com. The stock ran up into August, it was extended, it's corrected since then," Wald said.

He now sees it holding support above its 200-day moving average, a technical sign he views as a "resumption of long-term strength."

Overstock has gained 40% in January. It has surged more than 2,600% off its March bottom.

Disclosure: Joule is long WMT and KR.

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