A DIY Paradise

My first introduction to Restoration Hardware, RH, was when I received their 17 lb. catalog in the mail last year.  My initial reaction was what a terrible waste of natural resources. Apparently, I was not in the minority and until just recently during one of my daily opportunity scans, I had forgotten all about them.  In spite of the fact they have only been a public company for a bit more than 2 years, their stock has had a very nice run since its IPO as you can see in the weekly chart below.  Notice how price moved in consistent patterns. It moves up strongly, consolidates, breaks out of consolidation and begins the next leg up. Wash, rinse and repeat. Notice how consolidations can either be sideways or downward correcting. This is not unique to RH as all stocks follow the same course. These periods allow the bulls a well-deserved breather and to collect more participants if prices are going to move higher on a break of consolidation.  What should jump out at you in the bottom pane is how well it has performed against the broader SP500 index.

Savvy investors look for company stocks, like RH, who have been in strong uptrends and are consolidating as they present excellent profit opportunities if (this is the operative word) the uptrend continues.  In essence they are patient waiting for the right time but some sort of confirmation that the breakout is real.  Switching to the daily chart there are some very positive things in place.

1.      The moving averages are bullishly aligned and pointing up

2.      The longer term RSI is still in the bullish zone while the short term RSI shows positive divergence.

3.      The current consolidation has the look of a bull flag and is close to breaking above the blue upper channel.

4.      As price has corrected, it has bounced off the red horizontal support/resistance line which lets us know that price is hot and to be respected.  A breach below that level would be a bearish signal. As long as we stay above, its bullish.

5.      Price fell just far enough to close the open gap on the last move up.

6.       It looks as if the MACD is turning back up and will soon move above both the zero and its signal line.

The only piece that is missing and would be the icing on this RH investment cake would be to see a spike in volume on a breakout. 

With an upside breakout target of around 106 and a very clear exit strategy of a break below the red horizontal support line, RH presents a very nice risk/reward that is more than 3:1.  

It’s important to remember none of what I post in this blog should be taken as a recommendation. This blog and all posts are intended to be educational in nature only.