This Stock Is One Bad Day Away From A Breakdown

Thursday, September 22, 2016 - 12:30pm

by Michael Kahn

It's no secret that I don't think much of the housing and real estate sectors in terms of stock market investments right now. Last week, I panned homebuilder Lennar (NYE: LEN), calling it one of the first stocks you should sell in a market correction.

My recommendation to short LEN turned out to be a decent plan. Before the market opened on Tuesday, the company delivered an earnings beat... that was quickly shrugged off as shares closed 3.5% lower on the day.

The weakness was blamed on slowing orders for the homebuilder, as well as a report showing lower-than-expected August housing starts that was also released on Tuesday.

Related sectors such as home furnishings look rather weak, too, with the Dow Jones U.S. Home Furnishings index breaking down below support and its 50-day moving average. 

The break was led by office furnishings stocks, but right on their heels is La-Z-Boy (NYSE: LZB), maker of the iconic reclining chair of the same name. This stock is one bad day away from a fresh breakdown of its own.

La-Z-Boy had a very strong run from February to August, culminating in a breakout of a short-term range on Aug. 23, with shares spiking to a new multiyear high. At that point, the chart looked rather good.

However, when quarterly earnings were released the next morning, LZB plunged more than 16% in the premarket. It closed off its worst levels of the day, but the new declining trend was clear and shares have been easing lower ever since.

LZB Stock Chart

Currently, the stock sits on its flat 200-day moving average. This itself is not a hard support level, but it does give us an idea that any further weakness will push the stock into the lower half of a much larger trading range spanning more than three years. The top of the range is defined by the December 2013 and August 2016 peaks, and the bottom is defined by the October 2014 and February 2016 lows. 

There is very little technically to refute the idea that LZB is in decline within the larger range. Momentum, volume and relative performance measures are bearish, as is the dramatic failure at new highs after earnings, which left a huge bearish reversal bar on weekly charts.

In the short term, though, the stock is even more interesting. Should the current two-week mini-range break to the downside, I would expect the next stop to be the bottom of the long-term range near $20. This could result in 20%-plus profits for the bears and a technical bear market for the stock. 

It should be noted that such a drop will also erase the entire 2016 rally, which would be a rather tall order. Support in the $24.35 area could provide a speed bump on the way down. (There's a "backdoor" method for turning a small drop like this into 25% to 50% profits while taking on less risk than shorting. Get the keys here.)

If the stock sinks through that $24.35 level -- which is a 50% retracement of the rally -- the odds of a full decline would increase substantially. 

Recommended Trade Setup:

-- Sell LZB short at the market price
-- Set stop-loss at $26.50
-- Set initial price target at $20 for a potential 22% gain in four weeks

This article originally appeared on ProfitableTrading.com: This Stock Is One Bad Day Away From A Breakdown

Michael Kahn does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.