Short This Retail Stock

10/23/2019 9:13 am EST

Focus: STOCKS

Elizabeth Harrow

Director of Digital Content, Schaeffer's Investment Research, Inc.

The technicals suggest that high-end retailer Tapestry Inc. (TPR) is will fail at overhead resistance, writes Elizabeth Harrow.

Disappointing gross domestic product (GDP) data out of China gave traders pause late last week, and high-end retailer Tapestry Inc. (TPR) was no exception. The stock opened down 1.4% before recovering to a modestly higher close, with the resilient price action suggesting that some concerns about the overseas luxury market have already been priced in. As a matter of fact, just days prior, TPR gapped lower to start the week on a UBS downgrade to neutral from buy, with the brokerage firm citing volatility in the Hong Kong market as one of the drivers behind the bear note.

But while the shares have been coiling aimlessly around $25 for over a month, TPR is trading within striking distance of a familiar trendline ceiling, according to Schaeffer's Senior Quantitative Analyst Rocky White. And if the shares once again back down from this looming moving average, put players stand to make a quick profit from the down trending designer stock.

TPR is now trading just a chip shot from its overhead 100-day moving average, which has served as resistance for more than 52 weeks. Over the past several years, there have been six instances of Tapestry testing its 100-day trendline from below; the stock's returns over the short term have been dismal. The average 10-day return is a drop of 5.73%; the average return over 15 days is 9.39% lower.

Tapestry is tentatively expected to report earnings sometime in the next 10 trading days and the equity's recent post-earnings track record has leaned bearish. Following its last six quarterly reports, the shares have ended lower the next day on four occasions. The average negative earnings move has been 12.5%, while the average positive earnings move has been 10.3%.

This time around, the options market is pricing in a 12.5% post-report move for TPR, according to Trade-Alert, and calls have been the options of choice. During the past 10 days, speculative options players have bought to open 11.98 calls for every put on TPR. This call/put volume ratio outranks 90% of other such readings from the past year, pointing to a stronger-than-usual demand for bullish bets relative to bearish ahead of earnings.

Traders looking to capitalize on another technical sell signal from TPR may want to consider at-the-money puts in the weekly Nov. 1 expiration series, which White's data suggests could return 128% if the equity's typical 100-day rejection pattern plays out. And while the as-yet-tentative earnings date coming up does add some event risk, the market appears to be pricing this in for the week of Nov. 4, when at-the-money implied volatility ramps up from about 34% — right in line with TPR's two-year historical averages — to nearly 64%.

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