Whirlpool Stock Moves Above Its 'Reversion to the Mean'

Whirlpool Corporation (WHR) reported solid third quarter earnings on Oct. 22 after the stock set its 2019 intraday high of $161.87 on Oct. 21. The stock ended last week above its "reversion to the mean" at $156.65. This consumer durables company makes home appliances including refrigerators and washing machines sold around the world under several brand names including Maytag and KitchenAid.

The stock closed Friday, Oct. 25, at $159.36, up 49.1% year to date and in bull market territory at 60.3% above its Dec. 26 low of $99.40. In the longer term, the stock set its all-time intraday high of $217.11 during the week of Feb. 6, 2015. The stock is thus also in bear market territory at 26% below this high. Whirlpool is relatively cheap with a P/E ratio of 10.13 and a dividend yield of 2.99%, according to Macrotrends.

The original reaction to earnings was negative as Whirlpool missed on revenue. On the positive side, the company cited balance sheet improvements. Revenue improved in Asia and Latin America, and the debt load has stabilized. 

The daily chart for Whirlpool

The daily chart for Whirlpool shows the formation of a "golden cross" on March 7, when the 50-day simple moving average rose above the 200-day simple moving average, indicating that higher prices lie ahead. When the stock traded to its Dec. 26 low of $99.40 and closed that day at $106.01, a positive "key reversal" occurred, as this close was above its Dec. 24 high of $104.85.

The stock is well below its annual risky level at $180.24. The close of $142.36 on June 28 was input to my proprietary analytics. The second half value level is $136.59, which was a magnet between Aug. 2 and Sep. 4. The close of $158.36 on Sep. 30 was an input to my analytics, and Whirlpool's fourth quarter value level lags at $101.24. The value level for October is $149.60.

The weekly chart for Whirlpool

The weekly chart for Whirlpool is positive but overbought, with the stock above its five-week modified moving average of $156.31. The stock is also above its 200-week simple moving average, or "reversion to the mean," at $156.65.

The 12 x 3 x 3 weekly slow stochastic reading rose to 87.11, up from 84.50 on Oct. 18. If this reading rises above 90.00, the stock would become an "inflating parabolic bubble." When you look back to its October low of $102.13, this reading was 4.85, well below the 10.00 threshold indicating that the stock was "too cheap to ignore."

Note the downtrend connecting the highs of February 2015 and June 2017, which is above the annual risky level at $180.24.

Trading strategy: Buy Whirlpool shares on weakness to the monthly and semiannual value levels at $149.60 and $136.59, respectively, and reduce holdings on strength to the annual risky level at $180.24.

How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31, 2018. The original annual level remains in play. The close at the end of June 2019 established new semiannual levels, and the semiannual level for the second half of 2019 remains in play. The quarterly level changes after the end of each quarter, so the close on Sept. 30 established the level for the fourth quarter. The close on Sept. 30 also established the monthly level for October, as monthly levels change at the end of each month.

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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."

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