Ralph Lauren Profit Beats and Stock Jumps - Here's the Trade Strategy

Countertrade shares of Ralph Lauren, buying weakness to its annual pivot at $118.60 and selling strength to its quarterly risky level at $130.02.
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Ralph Lauren RL gapped higher Tuesday after the luxury apparel designer and retailer beat fiscal-third-quarter earnings estimates. 

The stock popped above its annual pivot at $118.60, which indicates upside potential to its quarterly risky level at $130.02. 

My call is to countertrade the stock, buying weakness to the annual pivot and selling strength its quarterly risky level.

This earnings report was quite a surprise: Net income for the quarter ended Dec. 28 tripled to $4.41 a share from $1.48 in the year-earlier quarter. Holiday sales were outstanding for fleece and outerwear items. Here’s the full earnings commentary as reported by TheStreet.com.

The stock is reasonably priced fundamentally with a price-to-earnings multiple of 14.7 and a dividend yield of 2.42%, according to Macrotrends. 

With today’s earnings beat, Ralph Lauren extended its streak of beating earnings-per-share estimates to 20 quarters.

At $125.21 the stock is up 6.8% year to date. It’s in bull-market territory 50% above its Aug. 8 low of $83.69. The stock is also 6.3% below its 52-week high of $133.63, set April 24.

Ralph Lauren shares have been quite volatile since they set an all-time intraday high of $192.03 during the week of May 24, 2013.

The stock is consolidating a bear-market decline of 65% to its 10-year low of $66.66, set during the week of June 2, 2017.

From this low the stock had a bull-market run, more than doubling to a high of $147.79, set during the week of Aug. 3, 2018.

This was followed by a bear-market decline of 44% to its Aug. 28 low of $83.69.

This volatility is why its important to follow the daily and weekly charts and utilize levels from my proprietary analytics.

The Daily Chart for Ralph Lauren

Daily Chart For Ralph Lauren

Daily Chart For Ralph Lauren

Courtesy of Refinitiv XENITH

The daily chart for Ralph Lauren shows that the stock has been benefiting from a golden cross that formed on Dec. 31. This buy signal occurred when the 50-day simple moving average rose above the 200-day simple moving average. A formation of this sort indicates that higher prices will follow.

The chart also shows the 44% bear market decline to the Aug. 28 low of $83.69.

The Dec. 31 close of $117.22 was an important input to my proprietary analytics. The annual pivot for 2020 is $118.60, which the stock gapped above on today’s earnings beat.

The upside is to the first-quarter risky level at $130.02. The semiannual value level for the first half of 2020 is $96.22 and is the lowest horizontal line.

The close on Jan. 31 was an input to my analytics, and the value level for February is $105.81. The value level for this week is $112.60.

The Weekly Chart for Ralph Lauren

Weekly Chart For Ralph Lauren

Weekly Chart For Ralph Lauren

Courtesy of Refinitiv XENITH

The weekly chart for Ralph Lauren is positive but overbought, with the stock above its five-week modified moving average of $116.82. The stock is above its 200-week simple moving average, or reversion to the mean, at $103.86.

The 12x3x3 weekly slow stochastic reading is projected to decline to 80.85 this week from 84.99 on Jan. 31. 

Beware that this reading was above 90 - at 90.44 - during the week of Jan. 17. This is a warning for investors not to chase the momentum but to use strength to its quarterly risky level at $130.02 as an opportunity to book profits.

Trading Strategy: Buy weakness to the annual pivot at $118.60 and reduce holdings on strength to its quarterly risky level at $130.02. 

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the past nine closes in these time horizons.

Monthly levels for February were established based on the Jan. 31 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at midyear. Annual levels are in play all year long.

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 its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing 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 0 and 100, with readings above 80 considered overbought and readings below 20 considered oversold.

A reading above 90 is considered an inflating parabolic bubble formation, which is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10 is considered too cheap to ignore, which typically is followed by gains of 10% to 20% over the next three to five months.

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