Luxury retailer Ralph Lauren Corporation (RL) reported earnings before the opening bell on Tuesday, July 30, and beat analysts' estimates. The stock opened at $115.00 on Tuesday but quickly reversed direction, trading as low as $106.00 as guidance for the luxury retailer was disappointing. The stock is trading between its monthly value level for July at $103.67 and its 200-day simple moving average at $117.70. A negative weekly chart provided a warning.
The company is worried about the tough retail environment as foreign tourists are keeping their wallets zipped. It's a story where shoppers stay away from brick-and-mortar stores in favor of buying apparel and luxury goods online.
The stock closed Monday, July 30, at $111.27, up 8.6% year to date and up 16.4% since trading as low as $95.63 on Dec. 24. Ralph Lauren stock is in correction territory at 16.7% below its 2019 high of $133.62 set on April 24. The stock is reasonably priced with a P/E ratio of 15.31 and a dividend yield of 2.50%, according to Macrotrends. The retailer extended its winning streak of beating earnings per share estimates to 18 consecutive quarters, but weak guidance trumped that positive.
The daily chart for Ralph Lauren
The daily chart for Ralph Lauren shows that the stock has been flip-flopping between "death cross" formations and "golden cross" formations, the latest being a "death cross" confirmed on June 12. This signal occurred when the 50-day simple moving average fell below the 200-day simple moving average to indicate that lower prices lie ahead.
The stock is well below its annual risky level at $147.33. The close of $113.58 on June 28 was an important input to my proprietary analytics, and the results show a third quarter risky level at $154.50 and a second half value level at $73.26. The monthly value level for June is at $103.67. The 50-day and 200-day simple moving averages are $111.33 and $117.70, respectively.
The weekly chart for Ralph Lauren
The weekly chart for Ralph Lauren will be negative with the stock below its five-week modified moving average of $112.17. The stock is above its 200-week simple moving average, or "reversion to the mean," at $104.22. The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 30.00 this week, down from 30.05 on July 26. Back at the Dec. 24 low, this reading was 8.50, which is below the 10.00 threshold that defines a stock as being "too cheap to ignore."
Trading strategy: Buy Ralph Lauren shares on weakness to the 200-week simple moving average at $104.22 and to its monthly value level at $103.67. Reduce holdings on strength to the 200-day simple moving average at $117.70.
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original annual level remains in play. The weekly level changes each week. The monthly level was changed at the end of each month, most recently on June 28. The quarterly level was also changed at the end of June.
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 shares 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 last 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 reading below 10.00 as "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.