Pet Retail Stock Chewy Hits Key Support Zone
Chewy, the popular online pet store, hit an all-time high of $48.62 on June 6, only to see it tumble by over 20% soon after. The shares experienced a significant dip of 11% on June 11 following its quarterly earnings release. Despite some positive momentum briefly after that, Chewy stock has been struggling, recording two straight weeks of losses. Fortunately for investors, this downturn has positioned the company at an important technical juncture.
Historically Bullish Trendline in Sight
According to Schaeffer’s Senior Quantitative Analyst Rocky White, Chewy is now hovering just above its 80-day moving average, a level that the stock has consistently tested before turning north. For this analysis, a stock above its moving average for more than half of the preceding two months, alongside closing higher in eight out of ten instances, was considered a positive indicator. Based on historical data, six similar instances unfolded over the past year and a quarter.
- All six cases observed showed an uptrend after touching support around this area.
- In 78% of these examples, the stock ended up increasing within one month by an average of 10.9%.
- From its current price at $38.68, achieving similar gains would erase the quarterly decline and further boost year-to-date performance.
Positive Trend Indicators Unfolding
One trend indicator worthy of note is Chewy’s Relative Strength Index (RSI), which has drifted towards oversold levels close to 33. According to data, such readings have been precursors to several rallies in both fall and spring seasons so far this year. Furthermore, there are indications of potential upside pressure from short squeeze mechanisms.
- At its recent peak, the total number of shares sold short rose by an impressive 7.7%, surpassing 15 million short positions that represent a significant portion of Chewy’s entire available float (around 7.3%).
- Such a development could put substantial upward pressure on prices as investors who bet against the company scramble to cover their positions.
Bearish Options Bets Face Potential Collapse
Another encouraging sign is that investors in options have placed unusually heavy bets on downfalls, evidenced by an exceptionally high 10-day put/call volume ratio of 0.68. While more calls were sold than puts overall, this still points towards heightened pessimism due to the extremely low readings observed throughout the past year (lower than just over 8%). With a Volatility Scorecard rating of 8 out of 100, indicating lower actual volatility compared to what options prices reflect – Schaeffer’s volatility score is in the higher percentile for this measurement.
Premium Selling May Be the Key Play Going Forward
Chewy shares are also situated attractively from various option buying angles. With a volatility gauge at only 38%, which has slipped into its low seventh percentile of historical occurrences, such premium-selling plays would likely produce profitable trades as lower-than-expected price swings make option premiums relatively affordable.
Conclusion
In conclusion, with a historically bullish trendline currently in view and options pricing reflecting higher volatility expectations than experienced realities demonstrate, buying or initiating positions now seems advisable for those willing to manage upside risks. As always, traders who understand market trends are best-positioned.
