Lowe’s stock is having a bad year. Since the start of the year, LOW has fallen nearly 21%, a victim of a weak economy and weaker-than-expected do-it-yourself demand. Over the past month, it has dropped almost 12%, putting it among the worst-performing large-cap stocks. The Barchart Technical Opinion indicator has slapped it with a 100% Strong Sell rating.
At a quick glance, Lowe’s looks like a name to avoid. But one investor says the stock’s poor performance is actually a bullish signal — and he has a trade ready to back it up.
The ‘2-8-D’ Pattern
Josh Enomoto, writing for Barchart, has spotted a rare quantitative signal in Lowe’s recent weekly candles. Over the last 10 weeks, the stock has printed only two positive sessions, meaning 80% of the weeks ended in the red. That is a significant signal, he argues, because it changes how investors see the company.
Most people think of Lowe’s as a reliable stalwart. Right now, it is not. The pattern, which Enomoto calls a 2-8-D sequence, has flashed 30 times since January 2009. His research shows that after those signals, Lowe’s tends to pop higher than normal over the next three to four weeks.
What the Trade Looks Like
Enomoto is suggesting a bull call spread on LOW stock. The spread involves buying a call at $190 and selling a call at $197.50, with both expiring Oct. 16. For the trade to work, Lowe’s would need to reach $197.50 at expiration.
The math is simple. A $375 net debit buys exposure to a maximum profit of $375, or 100%. That sounds reasonable until you look at the odds.
The Odds Are Below 50%
Wall Street’s options pricing model puts the breakeven likelihood at 42%, at $193.75. The full-profit probability sits at 33%, calculated by reverse-engineering Barchart’s Expected Move calculator. Neither number is above 50%.
That means the trade is a losing proposition over the long run. Enomoto himself admits as much: since neither the full-profit nor the breakeven probabilities are above 50%, your portfolio will likely sink if this exact trade were repeated over the theoretical long run.
But he offers a counterargument. Those odds assume a random-walk framework, where the future is independent of the past. Enomoto argues that the future can depend on the past — a nonrandom walk.
The Historical Evidence
Using Barchart’s data pools, Enomoto has calculated the exceedance ratio for Lowe’s. Around Oct. 9, one week before expiration, LOW has a 46.7% chance to hit $197.50 and a breakeven probability of 60%.
The numbers come from 30 occurrences of the 2-8-D sequence since January 2009. Fourteen of those times, Lowe’s reached $197.50. Eighteen times, it broke even.
| Event | Probability | Calculation |
|---|---|---|
| Reach $197.50 by Oct. 9 | 46.7% (14/30) | 2-8-D sequence history |
| Breakeven by Oct. 9 | 60% (18/30) | 2-8-D sequence history |
| Full-profit odds | 33% | Reverse-engineered Expected Move |
The Philosophical Question
Enomoto spends a section of his article on what he calls the “main philosophical point.” Any argument about the future must presuppose a framework. A fundamental analyst who calls a stock undervalued assumes a justified higher valuation. A technical analyst who expects a breakout assumes a higher price to break out to.
Enomoto’s framework is that an unbalanced order flow may lead to an extractable variance between what would be normally expected versus what might actually happen. He uses proprietary programming with Barchart’s screeners and data pools to find what he believes are the most probabilistically efficient ideas.
He is upfront about the limits. He will not always get it right — that is an impossibility. But with data analytics, he can better sniff out potential opportunities.
Our Call
The pattern exists. The historical record shows Lowe’s tends to pop after these signals. The probabilities, however, are below 50%. Enomoto acknowledges that himself.
This is a trade for contrarians who are comfortable betting on a pattern rather than on a coin flip. It is not a recommendation for everyone. It is a bet on a signal that has worked before, but the odds are not generous.
Lowe’s stock may surprise to the upside. The trade Enomoto suggests is one way to play that surprise. Whether it pays off depends on whether history repeats — and history does not guarantee a repeat.
Source material: “This Blue-Chip ‘Loser’ Just Might Offer Contrarians a Pleasant Surprise,” Yahoo Finance.
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