Shares of luxury goods retailer Coach Inc (COH) have had a brutal 2014, sitting some 40% lower since January. In recent days, rumors surfaced that French luxury goods company LVMH (LVMUY) might be interested in buying the company, and while Coach stock hasn’t made a huge move on the news, COH has formed a defined area of support since this summer that active traders and investors could use to lean against on the long side.
With the broader stock market showing increased volatility again over the past week or so, I spent the last couple of days looking for stocks that showed relative strength (i.e., didn’t participate in the selloff and instead traded sideways or even slightly higher). Some beaten-down issues including Coach stock came to my attention, and any year-end Santa Claus/oversold rally could lift this stock nicely.
At the same time that the rumor of a potential LVMH bid for COH made the rounds last week, it also was reported that some unusual options activity was seen in out-of-the-money calls, suggesting someone was loading up on a speculative position in Coach stock to profit from a pop in the stock.
Coach Stock Charts
Looking at the multiyear weekly chart of Coach stock, we see that the strong 2010 and 2011 rally has been completely retraced, with the stock trading at early 2010 levels. From a technical perspective, COH since July has been bouncing around a support level that stretches back to 2010 (black horizontal), but while price hasn’t moved higher yet, momentum as represented by the Relative Strength Index (RSI) has moved up, thus flashing nice positive divergence.
From this perspective, we thus see that downside momentum has exhausted itself, and the series of higher lows since July may be giving traders a leading indicator that price will soon follow higher as well. Furthermore, as a result of the multimonth consolidation phase in Coach stock, the Bollinger Bands are trading in a tight fashion, suggesting that a more meaningful directional move could soon follow.
On the daily chart, we more closely see the sideways sidle that Coach stock has exhibited since July, which now gives active traders and investors clearly defined lines of support and resistance to focus around. Specifically, support for COH comes in at $33.50, and resistance at $37.50. Immediate-term resistance comes in at $36.30.
While the case for a continued selloff in the stock and thus below support can be made, the relative strength that Coach stock has exhibited as of late, coupled with the aforementioned rumors, make COH an interesting candidate for a year-end rally.
Active traders and investors could look to buy Coach stock on a daily close above $36.30 and add to the position on a push through $37.50, for a move into the $40 area.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.
