Liquidity Services' Bull Fever Here and Gone

 | Feb 07, 2014 | 5:00 PM EST  | Comments
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Liquidity Services (LQDT) operates online auction marketplaces for sellers and buyers of surplus, salvage, and scrap assets in the U.S. The company caught Bull Fever in early 2011 and over the course of 18 months it soared from $15 a share to more than $65. Unfortunately for those bulls, Bear Fever took over in mid-2012 and in the following 18 months most of those gains were wiped out.

Liquidity Services has spent this past quarter consolidating around the $22 mark. Despite larger market weakness for the past several weeks, the company managed to hold onto the lows within that trading range, so when the company reported better than expected fiscal first quarter earnings ahead of Friday's opening bell Liquidity Services once again caught the market's attention.

Analysts' consensus had placed earnings at 22 cents a share, but Liquidity Services came out with earnings of 32 cents a share instead. Shares jumped from $21.29 at Thursday's closing bell to open at $23.56 on Friday. That premarket rally continued into an early afternoon high of $25.74 before intraday exhaustion set in.

 

Liquidity Services (LQDT) Daily Chart
Source: TradeStation

 

Many bulls may be viewing Friday's action as a sign that the worst is over. In the past six months we've seen many downtrodden stocks reclaim lost ground and finally join the larger bull market run. Despite Friday's move in Liquidity Services, I do not believe that this will be the case for this company. The trade action throughout the day has been ideal for the intraday trader, but the larger time frames still suggest that the bears continue to have the upper hand.

The price action that stands out the most in favor of the bears is taking place on the monthly time frame. Although the selloff since 2012 has been more gradual overall than the prior rally, the uptrend was smoother, with shorter periods of correction than compared to the bear market move. On the downside Liquidity Services has been struck by rapid, short-term selloffs (most often after a disappointing earnings announcement), followed by a much long corrective phase.

 

Liquidity Services (LQDT) Monthly Chart
Source: TradeStation

 

The last correction in Liquidity Services lasted from February to October. This correction broke quickly to the downside in early October with a continuation move in late November leading into the congestive move of the past quarter.

What this price action means over the past year is that the downside momentum has not slowed at all. Each of the impulse moves on the downside has been as large or nearly as large as the prior one and the overall channel of the selloff has not shifted much since mid-2012. When a stock has a price rally that created an inverted "V" at highs, similar to a mountain peak, the selloffs tend to diminish in intensity as the company begins to form a bottom. Rapid upside off lower support levels tend to be short-lived and followed by a retest of lows, and, more commonly, lower lows. We have yet to see this telltale price action unfold in Liquidity Services, so the odds are high that the bear market move will continue, albeit with a more gradual downside trading channel.

Another thing to take note of on the monthly chart of Liquidity Services is that most stocks coming off the "mountain peak" will return to at least the upper levels of the price zone of the prior "valley." In the case of this company, that target level would be that $15 level that it was trading at before the bulls came in full force. That leaves Liquidity Services with the potential for another $8 to $12 points of downside.

Volume is also key in this type of situation. While volume diminished as Liquidity Services fell into its corrective phase in 2013, it has been spiking once again over the past three months. Typically volume will once again start to diminish even as a company hits lower lows when a true bottom is developing and this type of volume spike will often indicate the early phase of a momentum shift where the downside channel will slow, but the company will continue to hit lower lows.

From the fundamental side, the numbers also raise some red flags. While Liquidity Services did beat estimates, its revenue fell 0.2% year over year to $121.9 million. Meanwhile, its total sales volume remained virtually unchanged this past quarter as compared to the same quarter one year prior. Additionally, the company has lowered its second quarter guidance. Coupled with the technical development of Liquidity Services on the monthly time frame, these numbers hardly support a 20% price jump, let alone a major reversal of the company's current trend. 

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