Boise Cascade Is Building Momentum

 | Oct 25, 2013 | 3:30 PM EDT  | Comments
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Boise Cascade (BCC), an Idaho-based company that manufactures wood-based building materials, has flown relatively under the radar since making its debut on the NYSE earlier this year. Initially, share prices climbed from $26 to highs of nearly $35. This success, however, was short-lived. The momentum shifted at the highs in March, and sellers rushed to the scene. A recovery attempt in April failed to break the prior highs, and shares continued to slide to a low of $22.80 in September.

The nature of the selloff and how the security has reacted at lows, however, is intriguing for the bulls. The selloff itself came in several stages. Three major waves of selling on the daily and weekly time frame had unfolded since Boise Cascade's all-time highs, and two waves of selling surfaced since its April attempt to retake highs. Both are common signs that a trend can be nearing an exhaustion point. Alone, however, this is not enough of a reason to anticipate a reversal. It's here that momentum plays the most important role.

Although steady, the pace of the downtrend as a whole has been more gradual than the initial post-IPO rally. This increases the odds that the trend exhaustion will give way to a reversal. These odds were enhanced by the behavior of Boise Cascade as it attempted to push to new lows throughout August. At this time, the pace of the downside subsided further. This created a lower low that served as one final move against the bulls. Shares began to move lower at a pace that matched the decline in the 21-day moving average -- another sign of an impending reversal attempt.

Unless you already had Boise Cascade on your radar, however, it would have been difficult to have caught the initial turn of the tide. The first strong rally in a security coming off all-time lows is rarely a sure sign of a lasting reversal. After all, in Boise Cascade alone, such an attempt was made once in mid-July only to be met with another strong decline. This time, however, we have better confirmation under way.

While shares did fall again from late September into early October, the descent was quite different than before. When Boise Cascade completed its second wave of selling on the daily time frame after the September peak, it had only retraced approximately 50% of the prior upswing before finding support. When this took place in July-August, the stock was already at new lows. The result was the development of an inverse head-and-shoulders pattern on the daily and weekly time frame. Each shoulder took approximately the same amount of time to develop, making it ideal for a continuation to the upside.

The trigger for the buy on Boise Cascade out of the inverse head-and-shoulders pattern came on the heels of its latest quarterly earnings. On Monday, the company reported that its net income fell 33% for the third quarter. This was stronger than anticipated, however, and the overall sentiment was quite optimistic. Earnings came in at $0.39 per share compared to $0.79 per share one year prior, but its revenue jumped 15% in the same time period.

Boise Cascade's future is closely tied to that of the housing industry, but as that market stabilizes, I suspect that Boise Cascade will be able to outperform. Demand will not only be tied to new-home construction but also a boom in remodeling older homes. At present, approximately two-thirds of the current available housing was constructed prior to 1990. Near-term resistance in Boise Cascade will hit between $29 and $30 a share, but a continuation move leaves a larger weekly target near $33 by early 2014.

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