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I love when I run my scans each night and get a signal for a stock (bullish or bearish) and then delve deeper into the analysis and find some amazing statistics. Last night’s bearish list produced just such a case in the form of LKQ Corporation (NYSE: LKQ). There are so many things going on with the daily and weekly charts for LKQ stock. The first thing that jumped out on the daily chart was the potential resistance in the $29.75 range and how we could be looking at a double-top in that area. I also took note of how the slow stochastic readings just made a bearish crossover.
As I always do, I turned my attention to the weekly chart and found yet another interesting development. It didn’t stand out on the daily chart, but stepping back and looking at the weekly, we could be seeing an inverse head and shoulders pattern. I have written about head and shoulders patterns and how they are bearish in nature. If you flip a head and shoulders pattern upside down, you get an inverse head and shoulders. And as you might suspect, the inverse pattern is a bullish one. I have marked the different parts of the pattern on the chart. We see the left shoulder formed back in January, the neckline formed in February, the head formed in March and the second trip to the neckline could be forming now. If the process completes itself, we should see the stock drop down to the $25 level and then the stock will bounce back.
The short-term bearish outlook for LKQ stock got my attention, but the sentiment indicators for the stock nearly caused my eyes to pop out. The overall sentiment composite is the lowest one I have recorded yet with a reading of 2.06. This low reading is a combination of a short interest ratio of only 1.3 and a put/call ratio that is lower than 99% of the readings for the past year. The analyst ratings really stood out as there are 13 “buy” ratings and only one “hold” rating. It seems that no one is bearish on LKQ stock right now.
I have to admit that the fundamentals for LKQ are pretty strong. EPS growth over the last three quarters has averaged 27% and over the last three years it has averaged 21%. Sales grew by 36% in the last quarter and they have averaged annual growth of 26% over the last three years. This type of performance certainly warrants some of the optimism, but I ran analysis on another stock the other night with similar fundamental stats and a better technical outlook. The sentiment composite for that stock was 16.70. Given the choice of investing in one or the other, I would opt for stock B over LKQ simply because of the sentiment.
LKQ stock is certainly worth keeping an eye both short term and long term. I look for the stock to drop down to the $25 range in the next few weeks and then you will want to keep an eye on what happens. If it drops below the low from March, the selling could accelerate. If the 25 level holds, the inverse head and shoulders pattern is complete and the stock should rise back above the neckline level. I would feel more comfortable being bullish at that time if some of the sentiment shifted to the bearish camp.
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