Restoration Hardware ($RH) is restoring my faith in the bulls. (November 11, 2020)


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I want to come back to Restoration Hardware ( NYSE: RH ). I covered this yesterday in the Free Chart of the Day and so I am coming back to it. The stock broke out and ran up 8 percent today, which is a good thing. But let’s talk about this for a second.

This little box I have, this is on TC2000. What it does is, it encapsulates it engulfs all trading ranges. In other words, like you can see here, where the box is now, the low corresponds with this low on this day, on the 2nd. Now, if I drag it over more it’s going to fall clear down to encompass this low. I don’t have to do anything it just does it on its own.

Similarly, on the upside, if I drag it back to here, see it rises, we can stretch this out, I am getting to a point here; we can drag it back further and boom, it pops up, and then again it pops up there, it can go all the way back to here and this is where the box is. I like to analyze stocks in this way for breakouts and this is why: For one thing, on the near-term stuff like here, this gives me a sense of how far a stock has gone, in whatever period of time, before it broke out, and so today is the breakout.

This stock has run up 20 percent in 8 trading days. That’s kind of a big deal, and what this does is, it kind of stretches the power of buyers out. In other words, it’s not compact, which is kind of what you want. You want to see a volatility squeeze or a volatility compression like this here for example; back here you can see how this stock was really in a pretty tight squeeze. If we go back and look at this box you can see it’s a very, very tight squeeze and then the stock ran up and, boom, the rest is history.

So come back to the present day and we’ve got a little different situation. How do we assess whether this breakout is something to be bought? I will tell you how; it just depends on how you draw your box. If we go all the way back here, this is on September 10th this was an earnings pop. We can look at this and say, okay, the high of this day was 410.50. So today, finally, we got above this and it’s at 414.00. So finally after all of this time we finally got a breakout.

That’s all well and good, but the way I look at it is, this is 44 bars that’s a little over 2 months of trading. This is a lot of price action in order to consider this trade, clear back here, to be relevant, this is resistance. By the time the stock is out here, don’t you think all of those weak hands who weren’t happy buying at the top, don’t you think they would have sold? I do; and so we actually stretch this less. We bring it in and then we can look at the same thing here, 20 bars, it’s been a month or so.

I would say on this one, just because we are in this kind of market, I would even bring it here, we’ll leave it right there. I would even bring it here; so the low of the box is here, the top of the box is there. And so this does, in fact, give us a bonafide breakout, from the breakout level it’s up about 4.5 percent on big volume.

I took a small position in this. I’m trying to make money here I’m not trying to lose it. I am not taking any small positions in this market and anybody that tells you they are either lying or they don’t understand risk; because it’s a very risky market right now. But I took a small position in this stock and where I am going to put my stop is just below today’s intraday low. You have got to put it somewhere and so I am putting it just below today’s intraday low.

I could go higher but the way this stock is trading it just seems to me like I would have a pretty good chance of getting stopped out if I put it say at 395.00. This stock will move in a natural way and could very well fall down below 400.00 again, it certainly could. My basis for this stock is on this breakout day if the stock completely reverses today’s price action then I have to consider that a failed breakout and I will take my loss on it. If it pulls back anywhere in here and finds support I’m good. The breakout didn’t continue, it pulled back a little bit but there are still buyers there.

So many stocks just today actually broke out and then they pulled back. In other words, there was enough buying to push them out of a range and then the sellers came in and knocked them back down. So we have to be prepared for that or at least consider that with Restoration Hardware ( NYSE: RH ). My sense is, that the duration of time of this sideways consolidation is going to be enough to allow this stock to spring higher a bit more. And by the way, the squeeze is actually very close to the 50-day moving average, which I am always a fan of.

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