A Million-dollar Bet on Coach (COH)?

In the Seasonal Forecaster newsletter I usually focus on stocks with significant ‘tailwinds', meaning good combinations of strong fundamentals, higher-probability technical setups, and good seasonal patterns (track records of significant gains or losses over the near term).

On rare occasion, I deviate a bit and cover a stock with not-so-great fundamentals, but sporting a good technical setup and strong seasonal pattern. I will warn of the problems with the setup, and usually advise anyone considering the trade to take a smaller position.

Here is a stock that in the past year has reported declining earnings, and since early 2012 has managed a 58% drop. So why would I be considering a trade in this stock, especially a bullish trade? Because sometimes these trades work out well. The key is to look for major-player interest in the stock, and limit the risk on any trade.

This company is actually in a sector that has consistently done well – the luxury retail brands. Tiffany's stock (TIF) has marched almost straight upwards since early 2009. Their customers aren't worried about a weak economy. But my focus today is on Coach Inc. (COH).

At first glance, Coach's fundamentals don't look too bad. It has a 36% Return on Equity, a P/E ratio of 12, which is near the bottom of its 5-year range, and Coach pays a 3.6% dividend. However, Coach has reported declining sales and earnings for several quarters in a row now. So I'm considering a short trade, right?

No, this time it's a long trade, for three reasons.

COH has been rebounding for a several weeks now, forming an up-trending channel:

It may be hard to see on this chart, but since mid-June, volume on up-close days has been overwhelming volume on down-close days. This is usually a sign that some big players, most likely institutions, are accumulating the stock.

COH actually has a good track record of likely institutional participation in this stock, this time of year. Over the next 13 weeks, COH has gained an average 11.7%, with gains, usually double-digit, on 10 out of 13 years. This is probably due to institutions playing Coach's typically strong end-of-year holiday sales. So timing-wise, there is justification for considering a bullish trade on COH at this time.

Finally, at the end of last month, a big trade was placed in COH calls. Someone bought almost 8,000 COH February 41 calls, in a transaction just under $1,000,000. With COH current at 37.49, this is a big bet that COH will rise 9.4% in the next 24 weeks.

Famed option trader Jon Najarian, from CNBC's Option Action, noticed this trade, as well as heavy buying in the COH February 38.5 calls, and added some call options to his own account.

If COH gains enough to either meet the historical average, or to ride to the top of the up-trending channel, these option plays would be quite profitable. Even just buying the stock for a maybe 10% rise could make sense.

So how would I trade this? I would consider a very small position, for either a stock or option trade. I would target exiting a stock position as soon as COH nears the upper trendline (around 40).

For an alternative trade, I would consider a long call trade, but not with February calls. I would target a 20% gain in a 3 to 6 weeks, so I would use either November or January calls. I'll be conservative and look at the January 35 calls. These are in-the-money, currently 3.6 Bid, 3.9 Ask.

I would look to exit with a 20% profit within the next few weeks. COH would have to rise to only 38.80 within the next 4 weeks for the Jan 35 calls to be up 20% (theoretically).

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

The content on any of Market Tamer websites, products, or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options, and other securities involve risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities are not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/publications/risks/riskstoc.pdf). The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.

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