A Moving Average Squeeze For Lowe's

04/26/07 08:42:41 AM

by Arthur Hill

Lowe's is caught between two moving averages, and the squeeze play is on to see which one will be broken.

Security: LOW
Position: Hold

Lowe's (LOW) has yet to recover from the February–March decline and is showing relative weakness. Most stocks tumbled during this period, but most then recovered over the last six weeks. The Standard & Poor's 500 is trading well above its February high, but LOW remains well below, showing relative weakness. Score one for the bears.

FIGURE 1: LOWE'S, DAILY. The moving average squeeze is on as the consolidation formed between the 50-day moving average and the 200-day moving average.

Graphic provided by: Telechart 2007.

Despite relative weakness, the stock firmed just above 30 and consolidated over the last six to eight weeks. This consolidation formed between the 50-day moving average and the 200-day moving average. The 50-day turned down over the last few weeks and the moving average squeeze is on (Figure 1). The 50-day acts as resistance and the 200-day acts as support. The direction of the break will trigger the next signal.

In addition to a moving average squeeze, we also have a Bollinger Band squeeze in the works. These volatility bands are two standard deviations above and below the 20-day moving average. They contract as volatility decreases, which increases the chances of volatility expansion. Bollinger Bands do not provide any directional clues, and we rely on the direction of the break for a signal. Look for a move above the upper band to turn bullish and a move below the lower band to turn bearish.

FIGURE 2: LOWE'S, WEEKLY. In addition to the moving average squeeze, there is also a Bollinger Band squeeze in the works.

Graphic provided by: Telechart 2007.

While Bollinger Bands and moving averages tell us of the squeeze, I will turn to the actual prices for a breakout signal. The stock found support around 30.5 over the last four weeks and resistance just below 32.5. Note that the range narrowed even further in April. Look for a break above 32.5 to stoke the bulls and signal a challenge to the February high. Conversely, look for a break below 30.5 to signal a continuation of the February–March decline.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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A Moving Average Squeeze For Lowe's

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