One of the things I do every morning is search for specific candlestick patterns. As I ran my scans Wednesday night and early Thursday morning, I came across an interesting pattern in Ralph Lauren (NYSE:RL).
It did announce earnings Wednesday, which were better than expected on all fronts. The stock had a good pop, and we’ll look at that in just a minute.
I always like to look at the longer-term chart first just to give me a little more perspective of what the longer-term trend is. As I show you on the chart in the video, there’s obviously not a whole that can be said in a negative sense. From a pure price action point of view, the stock is moving higher. If, at some point, it’s going to put in a double-top or even a lower-high – or if it keeps ramping – it’s just too early to tell. But, more or less, it looks solid from this perspective.
Now, if we go a little closer and look at the chart on a daily basis and with candlesticks, we note something very obvious. That is this shooting star candle that happened Wednesday. I think I’ve talked about it in several videos already. I constantly hold webinars on this but shooting star candles are probably the highest probability trade signal that I usually get, specifically if it coincides with some sort of a confluence zone.
Confluence zones can be anything where other technicals come together, such as moving averages, overbought levels and momentum, Fibonacci retracements and that kind of stuff. In this case, there’s really no confluence zone, so to speak, except that we are now back at a high from early first quarter 2012.
RL is quite extended from the moving average; that’s one potential thing speaking for the trade. The trade I’m really looking at is to short RL for a little bit. The best part about this is, A, it is trading against the 2012 highs. We have a very, very defined risk at the top of the Feb. 6 high that’s almost exactly 3%. A lot of times, I like to use a 3% stop, so this works out perfectly.
What I’m looking at is a potential fill of the gap I show you on the chart in the video, meaning at least a three-quarters retracement of Wednesday’s rally.
However, we have some conflicting signs with momentum. The stock could actually move a lot higher a lot quicker based on this only. Otherwise, it is a valid setup as far as I’m concerned to short RL at Wednesday’s closing levels of $174.63. Again, the best thing is that there’s defined risk so we’ll be instantly proven wrong if RL rallies 3% higher.
The broader market, by the way, remains overbought, although it remains very resilient. At the same time, while I do want to remain long to some extent in the portfolio, in these sorts of overbought conditions, corrections can come very quick.
So, you may ask why I keep highlight potential short-side opportunities to catch a little bit of weakness should we get it. There’s no reason in chasing any moves in the broader market, just like there’s no reason to chase a move higher in any individual stock. RL essentially closed at the lows of the opening and closing trading session Wednesday, so that offers good risk reward.