Friends, trends, and when they bend

●EPAY up 100% on year, 78% since May

●Heavy EPAY options volume yesterday (mostly calls) as stock fell more than 2%


Those fond of rhyming market wisdom will recall that “the trend is your friend,” but the hard truth is that trends can be fickle. Just when you think the trend you’ve been riding for weeks or months is your BFF, it turns on you, leaving you to ponder another market rhyme: The trend is you friend, until it ends.

Bottomline Technologies (EPAY), 7/18/16–10/2/18. Bottomline Technologies (EPAY) weekly chart. Momentum with a capital “M”

Source: OptionsHouse

Digital payments company Bottomline Technologies (EPAY) has likely made a lot of friends over the past couple of years, having nearly quadrupled from its August 2016 low and gaining more than 100% this year—78% just since April 30 (chart above).

Those numbers reflect the stock’s nearly 3% decline over the past couple of days, by the way. The daily chart below shows that, as of mid-session yesterday, this pullback was one of only a handful that have occurred over the past couple of months:

Bottomline Technologies (EPAY), 7/26/18–10/2/18. Bottomline Technologies (EPAY) daily chart. Just another pullback?

Source: OptionsHouse

Whenever a trend is as long and as energetic as EPAY’s, contrarians are bound to try to pick the top. Someday—and it could be this time—they’ll be right. So far, they’ve been wrong, as virtually every dip the stock has made this year has been an opportunity to catch more upside, which is why EPAY has likely popped up on the watch lists of many momentum traders.1

With the stock dropping, volume in EPAY options yesterday was nearly seven times its daily average in early trading. While put volume was within normal parameters, calls were trading more than five times their normal daily rate, as shown in the following LiveAction scan:

LiveAction scan: Unusual call option volume, 10/2/18. Calls in play.

Source: OptionsHouse

Some contrarians may think the so-called “smart money” is shorting call options because they expect more downside, but given the absence of unusual volume on the put side, until the uptrend is proven to be kaput, momentum bulls could be positioning for more upside.

The question is not whether the latter group is correct (again), it’s where they’d decide they’re wrong—that is, where they’d place a stop-loss order to protect themselves in the event of further selling.

There are a couple of representative chart-based price levels these traders may use. They simply represent different levels of risk based on different definitions of what constitutes an “end” to the uptrend (refer again to daily chart):

1. Below the most recent (yesterday’s) low. This would be the most conservative (smallest loss) stop, but also the most likely to get triggered. Traders using a “tight” stop like this would likely assume the recent pullback was another one- or two-day event (e.g., the down days in early and mid-September).

2. Below the next-most recent swing low ($66.31, September 18). This stop has a lower chance of being hit, but it would also result in a larger loss. Coincidentally, it would allow for a pullback about the same size as the one from July (visible at the far left of the chart).

Of course, bulls who thought the current pullback could extend to the September lows may choose to enter closer to that level.

They key aspect of any stop level is that it should be based on the realities of price action, like the examples above, not an arbitrary dollar amount you “feel comfortable” risking.

Because, ultimately, the markets don’t care if you’re comfortable.

Market Mover Update: Brookfield Asset Management (BAM) traded 1.5% lower yesterday following Monday’s conspicuous high open/close bar.

Monday it was the Nasdaq 100 (NDX), yesterday it was the Dow Jones Industrial Average’s (DJIA) turn to make a new record high, with an assist from Intel’s (INTC) 5% intraday surge.

Despite trading in a narrow range, November WTI crude oil futures (CLX8) hit $75.91/barrel yesterday, the highest level in almost four years.

Today’s numbers (all times ET): ADP Employment Report (8:15), PMI Services Index (9:45), ISM Non-Manufacturing Index (10:00).


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1 Zack’s Equity Research. Here's Why Bottomline Technologies (EPAY) is a Great Momentum Stock to Buy. 9/26/18.