Under the Dome

Polo is an iconic designer name brand led by one of the most recognizable leaders in fashion, Ralph Lauren. The stock, RL, had an incredible run from the 2008-09 financial crisis, rising more than 500% peaking near $180/share. Interestingly, that $180 share price acted as resistance 3x as it failed in May and August of 2013 and once more in December of 2014. Notice how, after that final touch and subsequent decline the (red) 200 day moving average turned down in earnest and continues to point emphatically south. You can also see price has stayed under and respected the blue dome which has acted as resistance on both the way up and now down. In case it isn’t clear, this is a great example of a long term topping pattern and symmetry. A strong rise up, followed by a period of choppy consolidation where price goes nowhere and then finally the decline begins. And the symmetry occurs as prices follows a similar path down (right side of the chart) as it did on the way up (left side of the chart). Burn this into memory as being able to recognize (and act on) these patterns can be very profitable.

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Whether you are long (on the way up) or short (on the way down), it’s never easy as there will always be powerful counter trend rallies to challenge your fortitude. In the case of RL, the latest rally off its bottom retraced 20% and the one before that in October of last year rose more than 30%. Those that shorted the stock and hung with it through the many bounces have been handsomely rewarded as it has fallen almost 55% (peak to trough) in slightly over one year (not a bad return, eh?). And from what I see it doesn’t look like it’s done falling. The current price movement has formed a bear flag, retracing to the 50% Fibonacci level an ideal place to begin its next leg lower. If this were to occur, the next logical area for the stock to find support is at the red horizontal line (~$70), another 30% below from where we closed today. There is one black mark on this setup is the positive RSI momentum divergence. This condition is warning short sellers to be cautious and look for a counter trend rally strong enough to unwind the divergence.

As always and as a caveat to readers, all the examples I post on are not recommendations to invest in but rather as illustrations to learn from. With a market environment that I believe is conducive to it, investors should learn how to make money regardless of the market’s direction.