American luggage and handbag design retailer Vera Bradley, Inc. (VRA) missed earnings per share estimates when it reported quarterly results on Sept. 4. The stock was positions below its 50-day and 200-day simple moving averages, providing a warning. In addition, its weekly chart has been negative.
The stock closed last week at $8.85, up 3.3% year to date and in bear market territory at 39% below its 2019 high of $14.51 set on March 15. The stock remains in recovery mode at 11.5% above its Dec. 27 low of $7.94. In the longer term, Vera Bradley stock is in a steeper bear market, as its all-time intraday high of $52.36 was set in May 2011.
Vera Bradley shares are reasonably priced with a P/E ratio of 16.09 but do not offer a dividend, according to Macrotrends. The company reported that its total sales fell slightly below expectations as gross margins are squeezed by increasing tariffs and higher shipping costs.
The daily chart for Vera Bradley
The daily chart for Vera Bradley shows that the stock has been sliding down its 50-day and 200-day simple moving averages since setting its 2019 high of $14.51 on March 15. What's interesting to note is that, during this weakness, a "death cross" has not been confirmed, but it could be this week. A "death cross" occurs when the 50-day simple moving average falls below the 200-day simple moving average to indicate that lower prices lie ahead. We already had lower levels, and the stock is below its semiannual, monthly, and quarterly risky levels at $13.22, $13.63, and $13.94, respectively.
The weekly chart for Vera Bradley
The weekly chart for Vera Bradley is negative, with the stock below its five-week modified moving average of $10.18 and below its 200-week simple moving average, or "reversion to the mean," at $12.08. Note how the retailer has been below its "reversion to the mean" since the week of June 28. The 12 x 3 x 3 weekly slow stochastic reading is projected to end this week declining to 24.18 this week, down from 25.34 on Sept. 6. At the Dec. 27 low of $7.94, this reading was below 10.00, making the stock technically "too cheap to ignore."
Trading strategy: Buy Vera Bradley shares on weakness to its Dec. 27 low of $7.94 and reduce holdings on strength to its 200-day and 200-week simple moving averages at $10.79 and $12.08, respectively.
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 changes at the end of each month, most recently on Aug. 30. The quarterly level was 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.