Herman Miller Reports Earnings With Risk of Technical Downgrade

Herman Miller, Inc. (MLHR) makes office furniture concentrating on the education and health care industries. The stock set its 2018 intraday high of $40.65 on Sept. 20 and then crashed by a bear market 29% to its Dec. 26 low of $28.66. This day proved to be a "key reversal," and the stock is currently in bull market territory at 25.4% above the low. Herman Miller shares closed Tuesday, March 19, at $35.93, up 18.8% so far in 2019 and in correction territory at 11.6% below the Sept. 20 high.

Analysts expect Herman Miller to report earnings per share (EPS) of 61 cents when the company discloses results after the closing bell on Wednesday, March 20. The company beat EPS estimates over the past two quarters, and Wall Street expects this growth trend to continue. The stock is reasonably priced with a P/E ratio of 13.85 and a dividend yield of 2.19%, according to Macrotrends.

The daily chart for Herman Miller

The daily chart for Herman Miller shows that a positive reaction to earnings would result in a "golden cross," as the 50-day simple moving average at $35.14 would rise above the 200-day simple moving average at $35.31 and indicate that higher prices will follow.

The close of $30.25 on Dec. 31 was an important input to my proprietary analytics. This resulted in my quarterly and annual value levels at $33.06 and $32.99, respectively, and my semiannual pivot at $34.35. The close of $36.68 on Feb. 28 was also input into my analytics and resulted in a monthly risky level at $37.03.

The weekly chart for Herman Miller

The weekly chart for Herman Miller is neutral, with the stock below its five-week modified moving average of $35.32 and above its 200-week simple moving average, or "reversion to the mean," at $32.48. Note how the "reversion to the mean" (in green) has been a magnet since the week of Jan. 8, 2016, when the average was $26.87.

The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 83.41 this week, down from 87.73 on March 15, 90.17 on March 8 and 90.02 on March 1, which was the week of the 2019 high at $37.62. The stochastic reading remains above the overbought level of 80.00 and was above 90.00 as an "inflating parabolic bubble."

Trading strategy: Buy Herman Miller shares on weakness to my semiannual, quarterly and annual value levels of $34.35, $33.06 and $32.99, respectively, and reduce holdings on strength to my monthly risky level at $37.03.

How to use my value levels and risky levels: My value levels and risky levels are based upon the past nine weekly, monthly, quarterly, semiannual and annual closes. The first set of levels was based upon the closes on Dec. 31. The original quarterly, semiannual and annual levels remain in play. The weekly level is changed each week; the monthly level was changed at the end of January and February.

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 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 past 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 stock with a reading below 10.00 as being "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.