Hardwood floor retailer Lumber Liquidators (LL) got taken to the woodshed Thursday after the company issued a major profit warning, causing LL stock to lose more than a fifth of its value. However, from both technical and news flow perspectives, Lumber Liquidators might soon find itself able to work on a good oversold bounce — one that could pay off big for any active investors.
Specifically, Lumber Liquidators blamed the drop in existing home sales and thus lowered its earnings estimate to a range of $2.65 to $3 per share. Analysts were expecting EPS to be closer to $3.35. On the sales front the company also lowered expectations to a range of $1.05 billion to $1.10 billion, which looks, smells and is decidedly weaker than the $1.16 billion that analysts were looking for.
On the back of the news, stocks in the housing sector almost across the board sold off, but many of them managed to stage an intraday turnaround along with the broader market, thus closing the day well off its lows.
Analysts were quick to chase the news, and brokers like Credit Suisse and Jeffries both downgraded LL stock.
LL Stock Charts
To yours truly, just looking at the chart of LL stock in recent weeks and months, it’s not surprising that further weakness came about yesterday. From a probability perspective, however, Lumber Liquidators shares look to be nearing oversold levels that might not be immediately actionable, but need to be monitored closely because the rewards could be juicy.
On the weekly multiyear chart, note the ugliness of this week’s selling (big, red bar) and how it has taken the stock right to its 61.8% Fibonacci retracement level. This Fibonacci retracement measurement, particularly on longer-term charts over the years, has given me great reference areas and served me with countless great trades 0ver the years.
With the above big-picture support zone in mind, note that on the daily chart LL stock — with yesterday’s 21.54% selloff — dropped out of an already downtrending channel. From a technical perspective, this reeks of oversold territory, but one that first must prove itself by the stock showing some stabilization.
Also note how far LL shares are removed from their 200-day simple moving average (red line). But for the mean-reversion/oversold bounce trade that I have in mind, what’s even more interesting is how far removed from its eight-day moving average (blue line) LL stock now is.
Active investors would be wise to look for signs that the stock is stabilizing in coming days, which could come in the form of a strong intraday bullish reversal. The long side then becomes attractive for a bounce toward the $65-$67 area, leaning against the lows.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.