This news-inspired breakout -- founder Ralph Lauren has stepped down as CEO, and Gap (GPS) - Get Report executive Stefan Larsson will replace him -- is an extremely sharp reversal from Tuesday's close. RL is now trading at new September highs and is leaving behind what could be a major bottom. At least in the near term, the stock is set up well for more upside.
Early this week, RL began the process of retesting the August lows. After three straight losses on below-average trade, the stock reached the $104 area. With very low investor interest, RL fell below last month's low on Tuesday before closing the session at new 52-week lows.
With today's huge upside gap and surging buying pressure, shares are tracing out a powerful reversal. Left behind is a divergent moving average convergence/divergence low and multiple layers of support. RL bulls should be very encouraged by this action and be prepared to put money to work on weakness.
RL's initial layer of support is the early September peak just above $116. Slightly below is the stock's 50-day moving average at $115. A hold in this support zone would indicate exceptional strength. A drift down to the lower band of support, which would provide a lower-risk entry, is possible -- but considering the momentum on display this morning, it is less likely. The lower support zone includes last week's high just above the $112 area.
Considering the current bearish timeframe for stocks, it may prove wise to wait for today's breakout to develop further. A period of back-and-fill action before a new rally takes hold would not be a surprise. When the dust settles, a rally back up to major resistance near the $127.50 is a strong possibility.
Disclosure: This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.