Is Polo Ralph Lauren Bucking The Trend?

08/18/11 09:06:24 AM

by Donald W. Pendergast, Jr.

Here's an unusual stock to watch -- shares of Polo Ralph Lauren, even though they did sell off with the rest of the market, are still sitting near a 52-week high.

Security: RL
Position: N/A

Any time a stock comes out of a major market downdraft sitting near its 52-week high, traders and investors are sure to take notice. Polo Ralph Lauren (RL) is one such stock, and traders appear to be betting that the stock is going to remain a good value for some time to come. Let's look closer now.

FIGURE 1: RL, WEEKLY. To find attractive stocks in any market environment, look for stocks with above-average earnings potential that are sitting right near their 52-week high. If the daily and weekly technicals confirm the existence of a bullish trend, such stocks can be excellent vehicles to use as part of a covered call strategy.

Graphic provided by: MetaStock.

Weekly charts can help give investors a better view of the longer-term market terrain than daily or intraday charts can, and in the case of RL, things are still looking sweet (Figure 1).

The stock is up more than 250% since the major March 2009 low and its 21- and 50-week exponential moving averages are still running wide and straight -- meaning the spread between the two is stable (for now) -- and bullish. Money flow (based on the 21-week Chaikin money flow histogram at the bottom of the chart) remains well in bullish territory and there seems to be little on this longer-term chart to convince traders and investors that RL is a reasonably safe stock in which to deploy at least a portion of their stock portfolio assets into.

Of course, one of the main reasons that big money is still flowing into this issue has to be due to its very favorable earnings growth rate estimates, which is a clear case of a fundamental value (earnings per share) being one of the key drivers of a stock's price prospects over the near term.

Trading RL here doesn't look wise, unless you're a skilled intraday and/or swing trader looking to buy a position during intraday pullbacks to key support levels like moving averages, floor trader pivots, or Fibonacci confluence levels (or even better, some combination of those three types of support). Investors would likely do better to check out the covered calls available for RL, perhaps going out no more than one or two months on an out-of-the-money call in order to bring in some extra cash even as you buy a modest amount of downside protection.
Make sure the bid-ask spread is close and that there is a reasonable amount of open interest and daily trading volume at the strike/expiry combination you choose to buy. Happy, relatively stress-free trading is apparently possible, even in a crazy, news-blasted market environment like the one we deal with today. The key is to scan for stocks near their yearly highs and then do some extra work to confirm their technical and fundamental attractiveness.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title:	Writer, market consultant
Company:	Linear Trading Systems LLC
	Jacksonville, FL 32217
Phone # for sales:	904-239-9564
E-mail address:	lineartradingsys@gmail.com
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Is Polo Ralph Lauren Bucking The Trend?

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