Lowe’s (LOW) peaked back in late 2021 after rallying 340% through COVID-19.
Then the home improvement giant fell in the first half of 2022, losing over a third of its value by June.
Since then, flat sales and narrowing margins have kept a lid on LOW’s share price.
Even a promising rally in the middle of this year reversed when momentum faded out.
Yet with LOW now down 17% off its 2023 peak and looking oversold, I want to see how things might play out from here…
The Rally Fades
The left side of the chart below shows LOW’s sideways pattern that carried over from last year.
The longer-term 50-day moving average (MA, blue line) generally tracked sideways. And LOW was trading around the same level in May/June this year as in October/November 2022.
Lowe’s (LOW)
Source: eSignal
As is typical in a sideways pattern, the shorter-term 10-day MA (red line) crossed the 50-day MA multiple times in both directions.
In early June, the 10-day MA started accelerating above the 50-day MA, and LOW began to rally.
This rally coincided with the relative strength index (RSI) tracking in the upper half of its band (above the green line).
But while LOW was making higher highs (upper orange line), the RSI was tracking sideways in overbought territory (lower orange line).
This diverging pattern often leads to a reversal.
As the chart shows, LOW then locked in its peak at “A” and reversed when the RSI began to retrace lower.
Take another look:
Lowe’s (LOW)
Source: eSignal
LOW briefly (and bearishly) traded in the lower half of its range. The RSI then broke back into its upper band coming into September.
Yet it was unable to gain any traction.
Instead, the RSI rolled over, locking in LOW’s lower high at “B.” LOW continued to fall with the RSI tracking in its lower band.
You can gauge the severity of that fall by the sharp angle when the 10-day MA crossed and accelerated below the 50-day MA.
That strong move lower saw LOW recently trading around 17% below its August high.
However, it’s also put the RSI into oversold territory (lower gray dashed line)…
So what am I looking for?
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Potential Bounce
Our mean reversion trading strategy looks for stocks that have overshot in one direction. We aim to profit when they snap back the other way.
And that is what I’ll be looking for from here with LOW.
If the RSI can form a “V” and rally out of oversold territory, that could set LOW up for a bounce and a potential long trade.
The other thing I’ll be keeping a close watch on is our two MAs. As you can see, both are currently tracking lower.
If the 10-day MA bottoms out and starts tracking back up toward the 50-day MA, it will add further weight to any up-move.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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