Internet e-commerce pioneer eBay (EBAY) was busy Wednesday and Thursday—no, not among folks yearning for a great deal on a set of Wilson golf clubs—but with stock and options activity as share prices dropped 4.6% on Wednesday after several days of solid gains.
One day after EBAY inched to a new all-time high of $40.13, the stock gapped lower and dropped 5% intraday before recovering slightly. Options volume of more than 41,000 contracts—more than 20 times the 20-day average—featured a lot of activity in the January $38 puts.1
The stock had stabilized a bit midway through yesterday’s session, trading to a lower low but rallying into positive territory for the day, with a flurry of additional options trading in the morning. Were traders mostly collecting put premium in anticipation of a rebound, or positioning themselves for more downside?
Wednesday’s decline occurred on a conspicuous lack of news (FYI—expect eBay earnings sometime late this month), although there were reports in the aftermath that some analysts were projecting weaker revenues for 2018.2 The stock had a very solid 2017, though, gaining around 27%, and as recently as January 5 eBay had received some favorable analyst coverage from Citi, which upped its price target from $43 to $46, noting that while the company’s 5-10% growth was modest, its valuation was “relatively low.”3
As much as a buzzkill Wednesday’s sell-off may have seemed to eBay bulls, the stock has put up more than 270 one-day losses of 4% or more since it began trading in the late-1990s, while experiencing only one extended downtrend (2005-2009). Although some of these big down days were the initial volleys of what turned out be longer downturns, more often than not they’ve been short-term buying opportunities—although not necessarily exciting ones: the stock was up around 54% of the time after five days, with an average gain a bit above 1%.
But that analysis is so two days ago. What happens the day after these big drops appears to have an interesting contrarian connection to the stock’s subsequent performance over the next several days:
●When the day after a 4% or greater down day made a lower low (as it did on Thursday) and a higher close, the stock tended to have 1-2 days more of downside price action, but then moved higher over the next eight days.
●When the day after a 4% or greater down day had a lower low and a lower close, the stock tended to rally sharply for 1-2 days before moving mostly sideways over the next eight days.
These dynamics are also playing out at an interesting technical level: The Wednesday drop took the stock to the support implied by the late-December swing low—a level that, despite being broken by the October-November downswing—also functioned as support in September after turning back prices in July.
A reminder about the MLK market holiday: Next week will be shortened by the Martin Luther King Jr. holiday—US equity markets are closed on Monday, but some US futures markets (mostly financial contracts) will trade in shortened sessions.
1 Nasdaq.com. Noteworthy Wednesday Option Activity: LMT, NVAX, EBAY. 1/11/18.
2 Accesswire. Today’s Research Reports on Stocks to Watch: Shopify and eBay. 1/11/18.
3 Benzinga. Citi Raises Targets Amazon, Facebook, Priceline, eBay. 1/5/18.