Lowe's Companies, Inc. (LOW) reported better-than-expected earnings when it released results on May 20. The home improvement retailer gapped higher to $122.69 and then dipped to $115.52, holding its quarterly pivot at $115.57 as a buying opportunity.

The stock closed last week at $122.25, up 2.1% year to date and in bull market territory at 103.8% above its March 19 low of $60. Lowe's stock is also 3.5% below its Feb. 28 all-time intraday high of $128.23.

Lowe's beat earnings per share (EPS) estimates for the third consecutive quarter, and the stock is reasonably priced. Its P/E ratio is 19.50 with a dividend yield of 1.80%, according to Macrotrends.

The daily chart for Lowe's

Daily chart showing the share price performance of Lowe's Companies, Inc. (LOW)
Refinitiv XENITH

The daily chart for Lowe's shows that the stock had been above a golden cross since June 8, 2019. This buy signal occurs when the 50-day simple moving average rises above the 200-day simple moving average to indicate that higher prices will follow.

The stock was a buy at the 200-day simple moving average at $100.39 on June 8, 2019. Lowe's shares gapped higher on Aug. 21 on a positive reaction to earnings. The stock then tracked the 50-day simple moving average to its all-time intraday high of $126.73 on Feb. 20.

Since then, Lowe's stock cascaded lower to its March 19 low of $60.00. The 50-day simple moving average failed to hold on Feb. 25. The semiannual pivot at $112.65 failed to hold on March 5, just as the 200-day simple moving average failed to hold. This led to the crash to the March 19 low.

A death cross was confirmed on March 25 as the stock was rising. This was a reason not to focus on this signal at that time. The V-shaped rally took out the 50-day simple moving average on April 24. The May pivot at $104.91 was taken out on May 4.

Lowe's stock then moved back above the 200-day simple moving average on May 5, setting the stage for further gains. The close above the semiannual pivot at $112.65 on May 15 set the stage for a positive reaction to the earnings release on May 20. The gap higher to $122.69 on this report was followed by a dip to the quarterly pivot at $115.57 as a buying opportunity.

The weekly chart for Lowe's

Weekly chart showing the share price performance of Lowe's Companies, Inc. (LOW)
Refinitiv XENITH

The weekly chart for Lowe’s is positive, with the stock above its five-week modified moving average at $107.59. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $93.23. The 12 x 3 x 3 weekly slow stochastic reading rose to 71.36 last week, up from 63.3 on May 15.  

Trading strategy: Buy Lowe's shares on weakness to the quarterly and semiannual value levels at $115.57 and $112.65, respectively, and reduce holdings on strength to the annual risky level at $135.92.

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each calculation uses the last nine closes in these time horizons.

The second quarter 2020 level was established based upon the March 31 close, and the monthly level for May was established based upon the April 30 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.