Restoration Hardware Could Use Some Restoration of Its Own

 | Jun 03, 2017 | 12:00 PM EDT
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Friday's plunge in shares of Restoration Hardware, or RH  (RH)  as it is now known, could be viewed as the buying opportunity of the year. On the other hand, the balloon may have just burst. Depending on who you ask, and what they have to gain by answering, you could get more answers than you care to, or have the ability to, sort through.

We ran the company through our DSE (decision support engine) in order to get an objective perspective of the near, intermediate, and longer-term prospects for price movements. Here's what members of our live-market Trading Room and DSE Alerts services were informed of yesterday.

Chart one, above, is the daily bar degree of trend, which shows how overbought price had become into the mid-May price high near $60. The red line tested in early April and mid-May is the four-standard deviation band. It controls 99.9% of normality, and is an impossible to statistical extreme to maintain for more than a few days.

The first touch is called the setup, when media outlets highlight the strength of the price action. The second test often becomes the trap, when late-joining investors give up waiting for a correction to buy the dip, and just join in on the hype being heard at water coolers and on Uber rides.

The telltale warning that the trap is about to spring shut is seen at the second, May price thrust. Notice that stochastics failed to make higher highs along with prices, creating a bearish divergence sell signal. Then, after the sideways action in the $50s, stochastics deteriorated further, setting up the mini panic that Friday's gap lower illustrated.

Notice that price is no longer anywhere near that four-standard deviation band now. In fact, price is no longer near the three-band (orange), or even the two-band (olive/gold) either. Price is now headed for that blue line in the $36s, which is the 200-day moving average.

If you're wondering if now is the time to buy, the question is very valid. The DSE is no longer in the immediate sell condition that it was in the $50s. However, it's not in buy condition either.

Objectively, buying conditions look opposite of sell conditions. Therefore, we would expect price to be down near the lower standard deviation bands, which now range from $18 to $8. In addition, at least these daily stochastics would have to be below the 10% oversold threshold, having recently reversed from above the 90% overbought threshold. That is not currently the case.

Chart two, above, is the weekly bar degree of trend, which shows that the rise into the May peak/reversal took price into the pink sell box (barely), and touched minimal Fibonacci resistance. However, as can be seen by this intermediate term perspective, there are now 13 to 21 weeks of downward price pressure before the condition moves from overbought to oversold, leaving plenty of price and time room for significantly lower levels to be explored. The green buy box illustrates just how low price could reach.

The DSE's warning to members of our subscription services, which can be tried for free by clicking the link above, is to avoid buying this dip, as selling actions are now indicated, even if the $50 +/-$2 zone is seen in an oversold relief bounce before price breaks below $25.

Therefore, since only selling actions are indicated, selling rallies, as well as selling further breaks below $35, are the optimal actions for the coming three to five months.

If currently long, use this as your protective sell stop to keep the current accident from becoming fatal. If flat, use the parameters above to establish short exposure. And, if already short, maintain or add to your position while being on guard to cover once price enters the green box.

For updates on this analysis, as well as other trading opportunities, try Ken Goldberg's DSE Alerts service for free for a couple of weeks, or contact him at support@dsetrading.com

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