Lowe’s Companies, Inc. (NYSE:LOW) shares are down heavy in early morning trading after reporting underwhelming earnings for the first quarter. The home improvement chain scored earnings per share of $1.03, which fell a few pennies short of analyst estimates. LOW stock’s forward guidance for full-year earnings also came in well below expectations.
Investors’ displeasure is on full display this morning as a flurry of “sell” orders are taking LOW down more than 4%. The plunge is shattering critical support levels, throwing a wrench into what was a decent uptrend.
Today’s smacking is carrying Lowe’s Companies shares into the heart of its previous earnings gap. From a charting perspective, we’re in the middle of no-man’s-land here. Potential support sits lower at $77.50 and $74.50. The former was an old resistance level. The latter would constitute a gap fill.
Both serve as logical downside targets if bears continue to press their advantage here. On the resistance side of the equation, $81 and $82 loom large. If Lowe’s Companies can claw its way back from today’s misstep, both levels make sense for upside targets.
Interestingly, today’s gap created a rare island reversal pattern. It’s as if anyone who purchased LOW stock over the past quarter just got marooned on an island. They’re all losing money, and due to the large down gap, they were robbed of any opportunity to exit at breakeven or a small loss.
Together, these losing longs create what’s known as overhead supply. This is the fundamental reason why the $81 and $82 levels have a good chance of becoming resistance when (or if) we rally back up there.
The LOW Trade
If you think LOW stock remains heavy over the coming weeks, sell the July $82.50/$85 bear call spread for 50 cents. The max gain is limited to the initial 50 cents credit and will be captured if the stock sits below $82.50 at expiration.
The max loss is limited to the spread width minus the 50-cent credit, or $2, and will be forfeited if the stock sits above $85 at expiration.
At the time of this writing, Tyler Craig had no positions in any of the aforementioned securities.