Trading when vs. trading why

03/19/19
  • Tech stock EGHT recently hit top of trading range
  • After late-2018 correction, stock is up around 35%
  • High call/put ratio aligned with challenge of resistance

Traders who have been watching the S&P 500 (SPX) for the past few months can appreciate how long a market can repeatedly bang up against a price level before pushing past it for good. They’ll likely find the following chart of 8x8 (EGHT) has a familiar feel to it:

8x8 (EGHT), 8/28/18–3/18/19. 8x8 (EGHT) price chart. Top of the range.

Source: Power E*TRADE


Since climbing off its late-October lows, the cloud-computing and communications tech company has been swinging between roughly $16.50 and $20.50 for the past few months, and for the past few days it’s been knocking around the resistance level at the top of that range—for the third time this year.

The longer-term chart below shows EGHT’s correction from its September high of $23.50 bottomed after the stock pushed temporarily below it early 2017 highs. Since then, it’s zigzagged its way nearly 35% higher:

8x8 (EGHT), 12/29/16–3/18/19. 8x8 (EGHT) price chart. The big picture.

Source: Power E*TRADE


With tech shares leading the market lately, some traders may reasonably look at these EGHT charts and see the potential for a tech stock to break out above resistance and possibly challenge its September highs. Among other factors, they may also note the stock’s most recent downswing in early March bottomed out at a much higher level than the November, December, and January lows (the lower boundary of the trading range.)

Fair enough. Other traders may share the same bullish outlook, but also see the recent ebbing of momentum around a conspicuous resistance level as a signal that they may be able to enter at a better price if the stock once again swings lower before staging a rally.

LiveAction scan: Highest call/put ratios. Traders scooping up calls.

Source: Power E*TRADE


The LiveAction scan above provides an additional perspective on the chart action. It shows EGHT’s call/put ratio yesterday was high—around 90 calls traded for every put. While some traders may consider that a bullish sign in certain circumstances, it’s also possible that it can indicate a short-term bullish sentiment peak, much in the same way put/call ratios can be very high when a market sell-off is reaching an extreme.

The fact that this high call/put ratio appeared just as the stock was wavering around an established resistance level could lend credence to the EGHT bulls who think better entry points may be on the horizon.

Traders with the same answer about “why” they’d make a trade can nonetheless have different answers about when they’d do it.

Market Mover Update: After dropping 1.7% on Friday, Array BioPharma (ARRY) followed through to the downside yesterday (see “Biotech stock's mixed signals”). Both Apple (AAPL) and Amazon added to their recent upswings (see “A for effort”) with solid rallies. And after quietly pushing above its longstanding resistance level on Friday, the S&P 500 (SPX) climbed above it a little more yesterday.

Today’s numbers (all times ET): Factory Orders (10 a.m. ET). FOMC meeting begins.

Today’s earnings include: DSW (DSW), HD Supply Holdings (HDS), Michaels Stores (MIK), FedEx (FDX), Franco-Nevada (FNV), Tencent Music (TME).

 

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