Shares of Coach (NYSE:COH) took it on the chin Wednesday to the tune of about 16% after the company announced its fiscal second-quarter results. And from a technical point of view, yesterday’s price action in the stock did some damage to the chart.
From a longer-term point of view, Coach has been fighting an uphill battle ever since it topped out in the first quarter of 2012. If we see the weekly chart of the stock, looking back to 2010, note the steep uptrend that eventually ended in a final push higher into early 2012 before things turned sour. This peak now also represents the head in a massive multiyear head-and-shoulders pattern.
Given the duration over which this pattern has been building, I am forced to be more approximate regarding the neckline of this formation (red horizontal), so I am calling it to be around the $52 mark.
Classically, if and when a neckline gets broken to the downside after forming the right shoulder (which was the case yesterday), chart analysts will start measuring an ultimate potential downside target from the pattern. The way one arrives at this target is by measuring the distance from the top of the head down to the neckline and then subtracting that number from the neckline. If we do this on the chart of COH, we arrive at a price target of roughly $27.
Again, given the duration it took for the stock to develop the head-and-shoulders pattern, it might not necessarily be the highest-probability trade to short the stock all the way down to $27. Taking a good 10% out of the stock on the downside, however, looks good now that the H&S pattern has triggered by the stock breaking below its neckline.
The new year started off well for Coach, which tagged along nicely with the broader market. However, Wednesday’s gap-down below the stock’s December lows was a game-changer, as it took the stock down to levels not seen since August 2012.
A little closer up on the chart, note the trading channel in which the stock had been bouncing since August 2012. Yesterday’s trading action slammed COH right out of this channel, thus also causing significant technical damage on the nearer-term time frame.
The low from August 2012 might serve as a next immediate-term target; however, given yesterday’s triggering of the longer-term head-and-shoulders, the 2011 lows in the mid-$40s serves as a better target for now.