Michael Kors Holdings Ltd: Slip Into a Trade Befitting of KORS Stock

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Like fashion, Wall Street is cyclical in what it hates and what it loves. Following a dismal two years of being shunned, 2016 is taking shape for a trendier Michael Kors (KORS).

Michael Kors Holdings Ltd: Slip Into a Trade Befitting of KORS Stock

KORS stock debuted as an aggressive and well-bid name from its late 2011 initial public offering and all the way into 2014. The desirable price action came courtesy of typical IPO favor and rose-colored growth prospects for well-marketed, mainstream names entering the secondary market.

At its high of $101.04, shares of Michael Kors gained 330% in a bit more than two years from a low of $23.51 set during its IPO week. Then, and as happens most often, the story for KORS changed rather abruptly.

KORS became a victim of its own and imagined future success dreamed up by Wall Street.

Investor support was inevitably replaced by steadier and less trendy items, such as KORS failing to meet demanding Street views, reduced guidance, brand worries, weak mall traffic and a host of other woes worthy of keeping the cyclical nature of stocks intact.

KORS stock is off by about 60% over the last nearly two years, but the storied and value-centric hedge fund Greenlight Capital must see something in the stock, as it doubled up last fall at an average price near $45/share for a 16 million share stake. What is it Greenlight sees? With minimal debt, and substantial stock buybacks acting as support, Michael Kors has our attention.

KORS Stock Weekly Chart

I’m unsure if argyle will ever be popular again, but one tried-and-true pattern with technicians, the triangle, has unfolded on the KORS chart.

010516-kors-weekly-chart
Click to Enlarge
Source: Charts by TradingView

Symmetrical triangles like the one in KORS are regarded as mostly neutral patterns. Once broken, shares could see a forceful continuation move or bullish trend reversal due to the coiled spring-like nature of the formation.

We’re of the technical opinion a pattern low is developing in KORS stock and the triangle will act as a reversal for a bottoming formation. But there is still reason to be respectful of a possible breakdown in KORS.

First, historically symmetrical triangles do maintain a slight trading edge as continuation patterns rather than reversal formations like the potential bottom in KORS.

Second, the KORS stock triangle is developing at the 76% retracement level from its IPO low in 2011. If triangle support is broken, the combination of pattern and Fibonacci failure would put KORS on the path back toward its all-time-low of $23.51.

KORS Stock Strategy

010616-kors-volatility
Source: Charts by TradingView

Given the potential for a trendy bullish chart to reemerge in 2016, and with earnings expected in early February, I like the purchase of an outright KORS May $45 call for up to $2.

There’s still a few months of life in the May contract, so time decay isn’t an issue; and KORS volatility is fairly priced overall, particularly in lieu of earnings that should be announced in early February.

I also like the use of the slightly out-of-the-money $45 strike. This KORS call contract lines up nicely with the pattern highs of the KORS stock triangle and where I expect a powerful and trendy move to launch from.

With this type purchase, risk is limited to the amount paid, but ultimately I’d look to use a stop loss, if needed, tied to stock should KORS drop below $38.71.

A stop order tied to a $2 drop in KORS stock would help minimize the position’s loss to approximately 60 to 75 cents barring a price gap, which mind you, is always a possibility.

But if given the opportunity to exit for the smaller loss using the stop, that’s better than potentially following KORS shares into the basement bargain bin of still unfashionable stocks.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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