Luxury retailer Ralph Lauren Corporation (RL) reports earnings before the opening bell on Tuesday, May 14, with the stock slipping below its 200-day simple moving average at $123.61 under a weekly chart that is set to be downgraded to negative this week.

Shares of Ralph Lauren popped higher on Feb. 5 on a positive reaction to earnings resulting from strong Christmas 2018 sales. The stock continued higher, setting its 2019 high of $133.62 on April 24. The retailer of Polo brand shirts is up 20.1% year to date and in bull market territory at 29.9% above its Dec. 24 low of $95.63. In the longer term, the stock is in correction territory at 15.9% below its 2018 intraday high of $147.79 set on July 31.

Analysts expect Ralph Lauren to post earnings per share (EPS) of 93 cents when it reports results on Tuesday. The stock is reasonably priced with a market-neutral P/E ratio of 17.70 and dividend yield at 2.01%, according to Macrotrends. Ralph Lauren has beaten EPS estimates in 16 consecutive quarters, so guidance is important. Online sales have been rising, while foot traffic in stores remains flat. How the retailer describes its international business will be key given the U.S.-China trade war.

The daily chart for Ralph Lauren

Daily technical chart showing the share price performance of Ralph Lauren Corporation (RL)
Refinitiv XENITH

The daily chart for Ralph Lauren shows that the stock opened below its 200-day simple moving average at $123.61, which indicates risk to its monthly value level at $115.23. This level was based upon my proprietary analytics and based upon the input of the April 30 close of $131.58. The close of $129.68 on March 29 was also an input to my analytics, and the quarterly risky level for the second quarter is $141.42.

The weekly chart for Ralph Lauren

Weekly technical chart showing the share price performance of Ralph Lauren Corporation (RL)
Refinitiv XENITH

The weekly chart for Ralph Lauren will be negative this week if the stock closes below its five-week modified moving average of $125.53 on May 17. The stock is above its 200-week simple moving average, or "reversion to the mean," at $104.48. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week at 67.06, down from 80.23 on May 10, making the weekly chart negative.

Trading strategy: Buy Ralph Lauren shares on weakness to the monthly value level at $115.23 and then to the 200-week simple moving average at $104.48. Reduce holdings on strength to the second quarter risky level at $141.42.  

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 semiannual and annual levels remain in play. The weekly level changes each week; the monthly level was changed at the end of January, February, March and April. The quarterly level was changed at the end of March.

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.