Today, we’re recommending a bearish trade on Lowe’s (LOW), which has been on a wild ride lately. An analyst at SunTrust Robinson Humphrey downgraded the stock before the opening bell on Tuesday, Oct. 14. This caused the stock to gap down before the open. However, traders started pushing the stock back up for much of last week — along with the rest of the market, which has been trying to recover from its big waterfall sell-off.
Unfortunately for LOW bulls, we agree with the analyst downgrade and don’t anticipate this recovery will last long.
On Aug. 20 — during the middle of the last bullish surge on Wall Street — Lowe’s beat its revenue and earnings estimates but issued guidance that was below previous levels. This caused the stock to gap down in pre-market trading, only to jump from an opening price of $49.95 to a closing price of $52.33.
We think traders got caught up in the wave of bullish euphoria at the time and gave LOW too much credit. Based on the declining same-store-sales growth levels Lowe’s predicted in its guidance, we don’t see how the company can continue justifying its current price multiples, and it doesn’t look like we’re alone. Since the recent bullish action lost its momentum, LOW has gone on to form a “triple-top” bearish reversal pattern, with resistance just above $54 that was completed with Tuesday’s break below support.
While the stock has since recovered from those lows, we expect to see LOW back down to $50 before too long. Lowe’s is scheduled to release its next quarterly earnings on Nov. 19, before the market opens. It will be preceded by the Home Depot (HD) announcement on Nov. 18. In the meantime, we recommend you prepare for another sell-off by purchasing the following put option.
‘Buy to open’ the LOW January 50 Puts (LOW150117P00050000) for a maximum price of $1.70.
John Jagerson and Wade Hansen are the editors of SlingShot Trader, helping investors capture options profits trading the news by using a proprietary 100% news-driven trading platform that turns event-driven pricing inefficiencies into fast profits. Get in on the next trade and get 1 free month today.
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