Michael Kors Holdings Ltd (NYSE:KORS) rallied nearly 5.5% on Wednesday on the back of a rumor that the company is considering a $10 billion takeover offer. The rumor put out there by Spanish news website InterEconomia.com was rather vague and did not specify who the bidder may be, nor what the source of the news was. Still, KORS stock accomplished some positive things, and the company now belongs on your radar.
When I last mused about KORS stock on June 2, I offered that the stock’s rally the day prior (June 1) looked promising for a move into the $50 area, or about another 10% higher. The stock proceeded to rally and just a few days later had reached my $50 price target. (Well done to anyone readers that participated in this trade idea!)
Since then however, Michael Kors has largely been stuck in a trading range. But after Wednesday’s rally, it has more hope for a resolution to the upside.
Eighty percent of the time, most stocks more or less trade up and down together. This is to say that typically, when an individual stock looks like it’s breaking higher or lower, unless the broader market looks likely to do the same, the odds of said stock making the move aren’t very high. If we translate this into the current environment where U.S. stocks are largely rangebound, then all else being equal, the probability of KORS stock making a meaningful breakout isn’t high.
Unless, of course, some exogenous event hits the news wires. Ahem.
KORS Stock Charts
First, we should look at the multiyear weekly chart of KORS stock.
Here we see that the selling spree from the 2014 highs down into the lows from this past January did manage to hold the higher low from 2012, which took hold about six months after the stock’s initial public offering. While the multiyear downtrend remains firmly intact, Michael Kors also is working on a series of higher lows this year. All this is pushing up against the purple dotted diagonal resistance line, as well as the blue 100-week simple moving average.
If and when shares can overcome this layer of resistance, they could head toward higher highs versus their March 2016 reaction highs.
But a breakout is no breakout until it actually takes place and holds for a few days (or weeks).
On the daily chart, we see that KORS’ high-volume rally from Wednesday may marginally count as a breakout past the purple dotted line. Also note that all of Michael Kors’ intermediate-term moving averages (50-, 100- and 200-day) are currently coiled tightly together. In other words, a better directional resolution in KORS stock probably isn’t far away.
Following Wednesday’s takeover rumor and the positive reaction in KORS stock, getting involved on the long side is a matter of risk tolerance.
Small long positions could be initiated in hopes that the takeover rumors come true, in which case the stock likely has plenty further to rally. The risk is that the rumors were just that, in which case the stock could quickly reverse Wednesday’s gains once again.
Traders do have well-defined technical support around the $46 area, though. So if the stock breaks below there, this could act as a clear last-resort stop-loss.
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