Buy the Earnings Dip in Lowe's? Let's Look at the Chart

Lowe's is taking it on the chin after reporting earnings. Is this a dip to buy? Perhaps not so fast. Let's look at the chart.
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Lowe’s  (LOW) - Get Report was taking in on the chin Wednesday, down about 6% despite reporting a pretty solid quarter.

The retailer’s negative reaction to the report isn’t that surprising, given Home Depot’s  (HD) - Get Report stumble on Tuesday despite beating on expectations.

For Lowe’s, the company earned $1.98 a share, missing estimates by a penny. Revenue of $22.3 billion flew high by 28.3% year over year and cruised past expectations by more than $1 billion.

Compable-stores sales were robust as well, climbing 30.1% vs. expectations of 22.8%.

Finally, fourth-quarter revenue and comp-store sales guidance came in well ahead of estimates, while the midpoint of management’s earnings guidance was about in-line with consensus expectations at $1.17 a share.

Trading Lowe’s

Daily chart of Lowe's stock.

Daily chart of Lowe's stock.

Some are wondering why the stock was trading notably lower than when Home Depot reported earnings.

My observation would be that Home Depot stock was up about 100% coming into its report, whereas Lowe’s stock was up about 170%.

Further, I find it discouraging to see a stock trade lower on what is ultimately pretty good news. 

While some investors view this dip as a buying opportunity - and with a long enough time horizon, it is - I view the price action as a concerning development in the short term.

A look at the chart shows Lowe’s stock breaking out over resistance in early October. That was when shares cleared $170 resistance from August and September.

Shares traded up to $180, but the stock was rejected from this level in four consecutive sessions. Then $170 failed as support on the pullback and again acted as resistance in November. The failure in November allowed a lower high to form, and with it, a downward channel (blue lines).

Now the stock is in a precarious position. Struggling to hold the $150 area, shares are trading down into channel support.

Should Lowe’s stock hold this area, look for a rebound back above $152, putting the 100-day moving average back in play. If it can do that, it's followed by the 50-day moving average and channel resistance.

This potentially low-risk dip comes after a decent pullback on solid quarterly results. If investors prefer to wait, that’s fine too.

If channel support fails, short-term dip-buyers will know it’s time to bail. A loss of this level could create an issue, because there’s not a lot of significance between $145 and $133 — with the exception of the 10-month moving average near $140. Near $133, the rising 200-day moving average comes into play.

In short, let’s see if channel support holds. If so, Lowe’s has a clear although potentially tough road higher in the short term. If it fails, we could see some more selling pressure before Lowe’s finds its footing.