Stock faces moment of truth

05/30/19
  • DXC has dropped more than 20% in May after a trading range breakout
  • Yesterday the stock reached a key support level
  • Open options positions are higher than average

Traders are often advised to “never try to catch a falling knife,” but what if it looks like the knife is already stuck in the floor?

Let’s start by looking at when one particular knife started falling. Traders who went short on the early-May downside breakout of DXC Technology’s (DXC) roughly six-week trading range have been rewarded with a 20% decline as of yesterday:

DXC Technology (DXC), 2/14/19–5/29/19. DXC Technology (DXC) price chart. May breakdown

Source: Power E*TRADE


Few people are likely to look at a skid like the one B2B tech specialist DXC has gone through recently—with only one three-day upswing in the past three weeks—and start sharpening their horns in preparation for a bullish play.

But in this case, the book may be significantly different from the cover. Traders who have been monitoring the stock longer term, and especially those who have been paying attention to recent options activity, may see a different story unfolding.

First, the weekly chart below shows DXC’s May downturn, which was in full force yesterday, dropped shares more or less to their December low a little above $49, a line-in-the-sand support level that bulls could be looking at as a potential reversal point—that is, a floor that could stop the knife from falling, at least for a while.

DXC Technology (DXC), 3/7/19–5/29/19. DXC Technology (DXC) price chart. Near support.

Source: Power E*TRADE


Prior significant lows often function as support levels—launching pads for up moves—and since this one also happens to be DXC’s all-time low, it’s likely bull and bears alike are looking for decisive price action as the stock approaches this level. Here’s the situation’s potential dynamic in a nutshell:

1. Bears will be hoping that many of the buyers who got in during the December–February rally placed protective stop-loss orders a little below the December low.

2. When triggered, these stop orders become sell orders that could add additional fuel to a down move.

One observation: It’s possible that DXC’s 20% drop over the past three weeks—which, remember, followed a six-week consolidation—already flushed out many of the less-committed buyers who entered on the early-year rally. That could mean there are fewer sell-stop orders lurking below the December bottom—i.e., less fuel for the bearish fire. It’s also possible that many short-sellers have piled into the stock in recent weeks.

Bulls, meanwhile, may attempt to get long on the initial penetration of the December low (especially if the move isn’t particularly steep), simply on the expectation that large, long-term investors may “protect” this general price level with additional buying. That would have the potential to trigger a short-covering rally—a sharp up move as short-sellers compete to get out of their positions.

This is why some short-term traders would consider this a favorable reward–risk moment: The stock is much closer to its support level than it is to any upside technical target, the most obvious being the lower boundary of the former trading range, around $63.50. And if the stock does make a significant move below the support level, they can simply cut their losses and move on.

LiveAction scan: Unusual open interest. Unusual options activity. Heavy interest in DXC options.

Source: Power E*TRADE


Finally, the LiveAction scan above shows DXC had one of the highest levels of open interest (OI) among individual stocks yesterday, which means there was an unusual number of open options positions—more than five times average, in this case. So, some options traders may have noticed the stock was approaching a possible inflection point.

Tech has had a few rough weeks, and it would be unrealistic to expect DXC to avoid further sector-wide selling, but wider market conditions allowing, what happens around this key support level may determine the stock’s path for more than a day or two.

Today’s numbers (all times ET): GDP (8:30 a.m.), International Trade in Goods (8:30 a.m.), Corporate Profits (8:30 a.m.), Retail Inventories (8:30 a.m.), Wholesale Inventories (8:30 a.m.), Pending Home Sales Index (10 a.m.), EIA Natural Gas Report (10:30 a.m.), EIA Petroleum Status Report (11 a.m.).

Today’s earnings include: GDP, International Trade in Goods, Retail Inventories, Wholesale Inventories, Pending Home Sales Index.

 

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