LHO Completes Double Bottom - Poised For Next Move

LaSalle Hotel Properties (NYSE: LHO), a real estate investment trust (REIT) that specializes in upscale luxury hotel properties in prime markets around the US, completed a classic double bottom pattern on November 17.  Dubbed a "Big W" pattern for obvious reasons when you look at the chart, the double bottom itself is a very reliable trading opportunity.  Now that the pattern has completed, however, we'll look at our options for setting up the next play with this stock.

LHO Daily Chart

The double bottom started at Point A on the chart, with the first leg completing at point B.  The bound back up to "C" completes the retrace leg, and we quickly return to the second bottom at point "D".  Stock pattern guru Thomas Bulkowski would classify this as an Eve & Adam double bottom due to the rounding effect at point B.  That does matter, since the potential rise is influenced by the shape of the bottoms.

If we measure the length of leg A-B, take 76.4% of that leg, and add it to point D, we come up with a price target around 27.70.  That target was met on November 17th, so we can consider the double bottom pattern complete.

It's important to note the candle that appears on November 17th as that target is reach.  The long upper wick on the candle, accompanied by higher than average volume suggests climactic activity where supply has now overtaken demand.  The likelihood of this stock climbing higher in this pattern is greatly diminished.  Indeed, we see the stock amble sideways for the next week.

Look closely at the activity on November 22nd.  We have very high volume on a day where the stock opened up, drove higher, and then plunged to its lows before closing below the open.  Similar behavior on much lower volume was seen the day before.  The range for the day was small, at least as compared to the candles that made up the entire prior leg up, yet our volume was very high.  From a Volume Price Analysis perspective (VPA,) this should be shooting warning flares all over your charts.  Remember that only the large institutions can really drive volume to that level.  Retail traders simply don't have the capital to do it.  Large institutions traded a lot of shares that day, but the price basically went nowhere.  Now, whether they were holding price down to accumulate large quantities or they were holding price down to unload large quantities, we don't yet know.  It's a sign, however, that the next move for this stock should be a fast, explosive move in either direction.

With that in mind, here's how we'll play this stock:

• The final leg of the "W" formed a flagpole, and the pattern for the past week was a clear bullish flag.  If we close above the flagpole, then we will take a long position, setting our price target at 31.11.  That's 76.4% of the flagpole height added to the current top of the flag.  Our stop in this case will be the mid-point of the flag on breakout day.
• If, however, the breakout is to the downside, signaled by a close below the bottom of the flag, then we will take a short position, setting our price target at 23.06, the low of the double bottom.  Once again, our stop will be the mid-point of the flag on breakout day.

We expect the move in either direction to be swift, matching the slope of that final leg in the "W".  If the stock meanders or doesn't move with the velocity we anticipate, then we'll exit the trade.  Lackluster movement would invalidate our interpretation of the behavior over the past week.

Once in the trade, we need to be cautious of overhead resistance on the long side, as well as a level of support on the downside.  There's really only one area of resistance of concern, and that's the dashed line at the top of the "W" pattern.  Other than that, there's not much constraining price movement.  On the downside, however, there's an extremely strong support level around 25.20 were a solid support line coincides with the 38.2% retracement level of the entire double bottom pattern.  The potential for a bit of consolidation at that level is significant.  If we're short, we'll tolerate that for a day or two, but after that we'll exit the trade.  Since we pay interest on short positions, each day it meanders sideways is another day that interest takes away from our potential profits.  When I'm short, I want the stock to move, not sit there in neutral.

As always, manage your trade to reduce and then to eliminate risk.  Take your profits at the first indication that the trade is no longer playing out as planned.  Always remember that risk management and money management are the keys to profit, and as always, know your exit strategy before you enter the trade.

Happy Trading.