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Today I’m recommending a bullish trade on Ralph Lauren Corporation (NYSE:RL), a company that designs, markets and distributes apparel and lifestyle products.
During October’s decline for the broad market, the S&P Retail SPDR ETF (NYSEARCA:XRT) dropped below its 200-day moving average. The ETF dropped roughly 14% from its August highs near $53 all the way down to the $45.50 level.
Something similar happened back in the first quarter of this year, as XRT dropped about 13% from its January highs.
After bottoming out in April, XRT staged a 24% rally afterwards, and it could be setting up for a similar rebound this time around. If you missed your chance to trade that dip last time around, you’ve been given another shot.
Instead of trading XRT, however, I am looking at another play in RL that I think presents an even better opportunity.
RL followed the retail sector higher during its prior recovery, and I’m expecting the same thing to occur this time as well.
After dropping sharply on Tuesday after reporting earnings, the stock is showing several technical signs that it will rise through the end of the year. November and December are generally bullish months for the market anyway, and the company is in a good technical position now.
First, the unusually high bearish volume (circled on the bottom of the chart below) on the day of the earnings decline may signal an exhaustion of the downside move. While it may sound counterintuitive, when I see large red volume readings, it can be a sign of capitulation by the bearish crowd.
That’s what we saw the next day when RL crossed below its 200-day moving average (blue ascending line) in the morning, only to rebound and close well above that key level. That intraday reversal to the upside is another bullish sign that I find encouraging.
Furthermore, RL has strong support near the $119 level (blue horizontal line), which should put a floor under the stock.
Despite the drop after the earnings announcement, RL actually beat its second-quarter expectations for earnings and sales after intensifying its social media marketing strategy. The company also opened new stores in Asia. Emerging markets may benefit from the mid-term elections, if international trade stabilizes with the new balance of power in the U.S.
Considering the technical picture and RL’s fundamentals, I’m recommending a bullish trade on the fashion company.
Using a spread order, buy to open the RL Nov. 30th $130 call and sell to open the RL Nov. 30th $132 call for a net debit of about $0.65.
Note: The bid/ask spreads for both options are fairly wide this morning. To avoid overpaying for this spread, be sure to use a limit order as you attempt to enter the position.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open.
Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.