As I mentioned in Friday’s newsletter, it always pays to have stocks in your watch list that present you with trading opportunities regardless of what direction the market moves. Although you may believe the market is headed higher or lower, you obviously can never know. After all, no matter what, the market always reserves the right to change its mind. One such stock that may fit that description of giving you a trade either way would be that of Guess ?, Inc..
Guess ?, Inc, designs, markets, distributes and licenses apparel and accessories for men, women and children. The company’s apparel is marketed under numerous trademarks including GUESS, GUESS?, GUESS U.S.A., GUESS Jeans, GUESS? and Triangle Design, MARCIANO, Question Mark and Triangle Design, a stylized G and a stylized M, GUESS Kids, Baby GUESS, YES, G by GUESS, GUESS by MARCIANO and Gc. The lines include full collections of clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets, knitwear and intimate apparel.
To review Guess’ stock, please take a look at the 1-year chart of GES (Guess?, Inc.) below with my added notations:
After breaking a major support level at $38 (burgundy), GES has fallen into a sideways, consolidation pattern know as a Rectangle. Rectangle patterns form when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. The nice thing about a Rectangle pattern is that it will provide you with clearly defined breakout and breakdown points. In the GES’s case, the Rectangle pattern formed a $35 resistance (red) and a $30 support (green). Eventually, GES will have to break one of those two levels. Judging from the recent attempts to break lower, it looks like it may end up being the support that finally gives.
Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown point to get the minimum price objective. For example, since the Rectangle pattern for GES is $5 high ($35 – $30), GES should climb to a minimum of $40 ($35 + $5) if it breaks above $35 or fall to $25 ($30 – $5) if the stock breaks below the $30 level. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.
The Tale of the Tape: GES has formed a very common chart pattern know as a Rectangle. This pattern shows clear breakout and breakdown points for a potential long or short position. For GES, a trader could enter a long position at the $30 support or a short position on a rise to $35. However, a lot of traders like to wait for the break up or down to enter the trade. So, a long trade could be made if GES were to break above $35 or a short position if the stock breaks below $30.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT