Pay attention
06/26/18

Sometimes the stars seem to align in the markets in a way that makes it almost impossible to think something’s not going to happen.

Take payroll and HR services tech firm Paychex (PAYX), which recently paused after a strong two-month rally. After hitting a six-month low of $59.36 in late March (a day after the company released its most recent quarterly numbers), the stock consolidated for a little more than a month before breaking out of its range in early May. PAYX shares have rallied more than 18% from their April low close to Friday’s high above $70—which was, coincidentally, right around the resistance level formed by the December and January highs (not counting the anomalous intraday spike above $73 on January 23):

Paychex (PAYX), 11/22/17 – 6/25/18. Paychex (PAYX) daily price chart. Consolidation near resistance

Source: OptionsHouse

Yesterday’s pullback near the June 15 low of $68.61 (and the intraday rally off of it) solidified the stock’s short-term consolidation—just in time for tomorrow’s before-the-bell earnings release, which stands a good chance of pushing the stock out of its current congestion. Consider how much PAYX tends to move right around earnings releases vs. during the month leading up them (for the past three years):

  • Average close-to-close change (up or down) for earnings day and the days before and after it: 1.35%
  • Average close-to-close change for the 20 trading days leading up to the day before earnings: 0.75%

In other words, there seems to be a good chance tomorrow’s numbers, good or bad, will trigger enough volatility to push the stock above its current long-term resistance or below its short-term support. (For the record, after its past 12 earnings releases, PAYX was trading higher seven times and lower five times, and the average five-day move was +0.65%.)

Either move could have the potential to be more than a blip, since a push above Friday’s high could bring in new buyers looking for a run to at least to the January 23 spike high, as well as trigger short covering from traders who were expecting a downturn at the resistance level. But more than an intraday move below the near-term consolidation low could scare some longs out of the market and attract short sellers. The following weekly chart shows that although PAYX has more than doubled since 2012, it’s had plenty of multi-week downswings on its way up:

Paychex (PAYX), 8/8/11 – 6/25/18. Paychex (PAYX) weekly price chart. The long-term path.

Source: OptionsHouse

Finally, there are two other pieces of information from yesterday that are worth taking into account. First, a LiveAction scan for unusual options activity showed volume in PAYX call options was well above average in early trading—a possible sign of bullish interest. Second, although PAYX shares dropped more than 2% intraday, they significantly pared their losses before the session ended (suggesting the dip attracted bulls), and they also fell much less than the S&P 500 (SPX), and much less than the Nasdaq 100 (NDX).

A consolidation at a notable price level, a volatility contraction, and an earnings announcement—that’s a confluence of events traders are likely to pay attention to.

Market Mover Update. After rallying more than 3% on Friday, Campbell Soup (CPB) exploded more than 10% higher yesterday amid reports of a possible buyout by Kraft Heinz (KHC),1 shooting above the first two target levels mentioned in “The knife and the spoon.”

 

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1 Barron’s. Soup’s On: Campbell, Kraft Climb on Rumored Deal. 6/25/18.