Lesson : Dissecting The 2013 Leg Of Lumber Liquidators' Rally

Lumber Liquidators (LL) debuted in 2007 — a tough year for IPOs.

The company also took on a challenging piece of the flooring trade, going up against national retailers such Home Depot (HD) andLowe's (LOW), as well as smaller flooring providers long established in their local markets.

But a gutted economy and toppled housing market weakened many local players, putting market share up for grabs. High-end consumers recovered rapidly; homeowners looked for remodeling solutions beyond the confines of the national retailers' catalogs.

Lumber launched its winning run in March 2012. From its initial breakout at 22.95 through the end of that year, shares rose 130%. From Jan. 1 to Nov. 18, 2013, the stock added 127%.

Investors trying to hop aboard at the start of 2013 found the early going a bit rough.

Shares formed a shallow cup with handle in November through January. The handle gave a 57.34 buy point during the second week in January. The market was in a confirmed uptrend. Lumber's fundamental vital signs were in order. The stock broke out in heavy trade on Jan. 24.

Easy as pie.

Shares made slow progress for about a month, rising 14%, then dived in heavy volume to test support at their 10-week moving average. The pullback stopped 6% below the initial buy point, but didn't trigger the 8% loss sell rule.

With a loss after six weeks, investors might have sold the stock to roll the capital into stronger performers. After all, a breakout gain that reaches 10% or more should generally not be allowed to turn into a loss.

But on Feb. 26, the stock regained support in heavy trade. It remained in buying range for several sessions, offering a chance to get back on board. IBD highlighted it in boldface in both the NYSE Stocks On The Move and Timesaver Tables on Jan. 31.

In the next four weeks, Lumber Liquidators climbed 25% above its initial buy point. The stock's third rebound from 10-week support was the clincher. It soared 23% in the week ended April 26, giving investors a cushion to ride out the final leg of the run.

The uptrend took a hit Sept. 27 on news that federal investigators had raided the company's offices, investigating alleged import violations. The rally broke decisively Nov. 22, when a short-seller questioned links between gross margin performance and the alleged illegal imports. Such drops gave a signal to take profits.