I’m adding LL as both an active short and a potential short setup with an entry to be triggered on a break below the primary uptrend line that began back in Dec 2011 (shown here on the daily chart). As an aggressive trader, often using what I refer to as an “anticipatory” trading style, my plan is to short a 1/2 position here as prices have ramped up about 4% at the open today due to LL’s quarterly earning report. That pop in prices puts LL at the top of what looks to be shaping up as a bearish rising wedge pattern. As the chart also highlights, both the MACD & RSI have been diverging (making lower highs) for months now as prices have continued to push higher. Again, shorting before any technical signs of a reversal is aggressive and based on the anticipation that prices will reverse soon. Taking only a fraction position will allow the flexibility to add to the position and lower my cost basis if prices continue higher (assuming the chart still looks constructive to shorting) and/or adding to the position following a break below the uptrend line assuming that prices turn down from at or near current levels (i.e.- scale in going forward regardless of which way the stock goes). Profit targets are marked with T2 being my current preferred swing target, stops TBD upon taking the next lot.
Out of curiosity, I decided to compare the stock price of LL (Lumber Liquidators, a retail lumber store) to the price of Lumber futures to ascertain if LL’s performance was directly affected by lumber prices (or if they effectively hedged their inventory against price swings in this somewhat volatile commodity, similar to how airlines hedge against fuel costs). As you can see from this chart comparing the two, the stock price of LL has a very high correlation to the price of lumber. Of particular interest on this chart, other than the extreme over-extended nature of both LL’s stock price and Lumber futures, is that large extremes readings in the Commercial Hedgers’ and Large Traders’ open interest has typically preceded significant tops in lumber prices. As noted on this chart, both Commercials and Large Traders are just starting to normalize after reaching extreme readings, which likely signals an imminent trend reversal (i.e.- top).