Stock Of The Day: How To Trade A Ralph Lauren Reversal

Ralph Lauren Corp. RL shares are trading much higher Wednesday. The company reported results well in excess of analyst estimates.

But some traders are anticipating a reversal. If the stock heads lower, they may be able to profit from buying put options. The price of a put should increase if the price of Ralph Lauren drops. This is why our team of expert traders has made it our Stock of the Day.

Many trading strategies are based on the concept of reversion to the mean. For example, it a stock is overbought, some traders will expect a reversion or move lower back into its normal range. They will enter the market as sellers and could pressure the stock lower.

The red line on the chart is two standard deviations above the 20-day moving average. Ninety-five percent of trading should be within two standard deviations of the mean. Because the shares are trading above this threshold, they are considered overbought.

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Good traders don't guess. They let the market tell them what to do.

Some traders would buy puts if and only if, the shares cross back below the line. This could be a sign that a reversal is coming.

Some would pick the $259 level as a logical place to have a downside target because there is a good chance there would be support.

This price has been resistance, and resistance levels can convert into support in the markets. This is a common occurrence.

Some of the investors and traders who sold shares around $259 in January thought they made a good move when the stock dropped soon after.

But when the shares broke through this resistance and moved higher, some of them decided the decision to sell was a mistake. Some vow that if they can buy their shares back at the same price they were sold for, they will.

This means that if RL drops back to around $259, these remorseful sellers will place buy orders. And if there are enough of these buy orders, it will create support around the same price that was resistance.

This could put a floor under the price and keep it from falling further. It would be a logical place to have a downside target.

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