by Serge Berger | October 23, 2013 8:31 am
Leather goods designer and retailer Coach (COH) reported its fiscal first-quarter results on Tuesday, beating on earnings ($0.77 a share vs. $0.76 expectations) but falling short on revenue ($1.15B vs. the estimated $1.19B). Investors in the stock were less than pleased with the results and sold the stock to the tune of 7.53% on the day.
On both the near-term and long-term charts, yesterday’s selloff tilted the stock decidedly back toward the negative side. Let’s have a look.
On the weekly logarithmic chart looking back to 2009, the stock had a tremendous run of around 600% into the spring of 2012. Unlike many stocks, COH stayed notable resilient during the various consolidation phases in 2010 and 2011 that took many stocks by surprise.
Through this long-term lens, Coach began its multiyear topping pattern in the summer of 2011 as it traced out what in hindsight now looks to be the left shoulder of a massive head-and-shoulders pattern. The March 2012 top then served as a classic overshooting and shaped the formation’s head. The stock’s subsequent selloff and lateral consolidation period ever since the spring 2012 top may be labeled the right shoulder, all of which rests on the thick black line, namely its neckline.
The head-and-shoulders formation is simple to spot — and while it’s not my favorite catalyst to short a stock over the medium term, it does tell me to stay away from the long side of the stock. In other words, from this point of view, while a break below the multiyear support level/neckline around $46.50 would be bearish, stocks tracing out such formations over a multiyear period are often also subject to sharp upside reversals and in the case of COH a break back above $60 would be bullish.
On the daily chart, yesterday’s selloff snapped a multiyear support line for the stock — on massive volume, I might add. The day’s selling finally moved the stock well below its 50- and 200-day simple moving averages, around which the stock had been consolidating over the past five weeks or so. From here, while an immediate-term oversold bounce is always possible, odds favor more downside, possibly for a retest of the $46 area, which as discussed above coincides with the longer-term neckline support area of the head-and-shoulders formation.
Learn more about the strategies Serge Berger uses to create profits in the market every day. Download his trading plan in the “Essence of Swing Trading” eBook by clicking here. At the time of publication, Berger had no positions in the securities mentioned.
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