RH Breaks Out Ahead of Earnings

RH (formerly Restoration Hardware Holdings Inc.) (RH) shares rose more than 3% on Monday morning, which extends an impressive 15% rally over the past five sessions. The move follows strength in the broader retail sector, with the SPDR S&P Retail ETF (XRT) trading up about 5% over the past five sessions. Shares of The Home Depot Inc. (HD), Lowe's Companies Inc. (LOW) and other home improvement companies have also moved sharply higher.

In March of this year, Wolfe Research analysts upgraded RH stock to Outperform from Peer Perform and assigned it a $119.00 price target, saying that the home-furnishings company is an omni-channel winner given its desirable true brand strength. The analyst also noted that free cash flow has greatly improved, reducing credit concerns and likely enabling both convertibles to settle.

The recent volatility comes ahead of the company's earnings report, which is expected after the closing bell today, according to NASDAQ. Analysts expect RH to post earnings per share of $1.01 for the quarter, compared with $0.05 per share during the year-ago period, according to Zacks Investment Research's survey of 11 analysts covering the stock.

From a technical standpoint, RH stock broke out from upper trendline and R1 resistance levels at around $105.15 last week before surpassing R2 resistance at $122.56 late in the week. The relative strength index (RSI) appears overbought with a reading of 72.30, but the moving average convergence divergence (MACD) experienced a bullish crossover earlier this month. These indicators suggest that the stock could see some consolidation before moving higher.

Traders should watch for some consolidation above R2 support levels at $112.56 before a further move higher. If the stock breaks down from these levels, traders could see a move lower to retest support levels near R1 support at $105.15. A further breakdown from these levels could mean a move all the way back down to the pivot point at $98.98, although this scenario appears less likely given the company's recent strength.

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.