MorningWord 7/28/15: $UPS Delivers

by Dan July 28, 2015 9:38 am • Commentary

On Friday’s Options Action on CNBC, my co-panelist Carter Worth laid out a very convincing bearish technical take on shares of UPS, watch here:

In Carter’s opinion, there are three charts to look at  as to why the stock will ultimately breakdown.

First, the two year shows a head and shoulders, with $95 neckline:

ups

Second, the four year targeting the trend-line from 2011 at $90:

ups2

Third, the fifteen year chart that targets the 2004 highs, and would also put in play the trend-line that has been in place since the 2009 lows:

ups3

The company reported better than expected Q2 results this morning, and endorsed the high end of consensus for the balance of the year, and the stock is up 4% this morning.  So what gives? Heading into today’s print, UPS was down 14.5% on the year, and down 20% from the 52 week and all time highs made in January. Sentiment had been poor recently. My OA c0-panelist Mike Khouw laid out a trade that targeted October expiration, and was slightly out of the money.

This trade is a great example of just how hard it is to trade around earnings events.  As we state regularly, you need to get a lot of things right when trading around events with options, direction first and foremost but also the magnitude of the move as you’re buying uncertainty in the form of higher implied vol. The third thing to get right is timing and the only thing this trade has going for it is time. They have three months for the stock to be at $91 which would be the break-even on the downside.

I would also add that playing for a breakdown at VERY important technical levels is so much harder than it looks.  The $95 level is called support for a reason. Since breaking above in late 2013, the stock has bounced from the $95 level five times:

UPS 2yr chart from Bloomberg
UPS 2yr chart from Bloomberg

I liked the idea expressed about UPS on Friday, and my only criticism is that it was a difficult press on the short side. I know quite well from having made this mistake often throughout my career, playing for the big one is generally a bad idea when a stock is oversold and sitting on what looks like a very vulnerable technical spot, as UPS was.

But now, a failure in the high $90s could set up for the perfect short entry.

A chart that had similar long term support was CAT at $80. For years traders have been gunning for it and then it took the 10% bounce from the early 2015 lows to almost $90 to create a solid short entry, but it’s paying off now for those who had the patience, persistence and proper trade structure.  $80 which was staunch long term support but now should be fairly important technical resistance:

CAT 5 yr chart from Bloomberg
CAT 5 yr chart from Bloomberg

If UPS can’t hold today’s early gains, then I suspect you have the short entry you want. And this is an important point because as much fun it is to roll the dice into the event, knowing that there’s potential for an out-sized move, getting involved with options from a long premium perspective after the event is actually easier. Vol has collapsed and there’s still some potential for a big reversal in the stock.