Putting a floor under prices?
04/18/18
Early in yesterday’s trading session, LiveAction scans showed options activity in Mohawk Industries (MHK) running more than three times its daily average, and heavier than normal call options activity relative to puts:
LiveAction Call/Put Ratio scan 4/17/18. Mohawk (MHK). Bullish options activity.

Source: OptionsHouse

The residential and commercial flooring powerhouse releases its latest earnings on April 27 (a week from Friday), so there’s a chance the options action is about traders positioning themselves well in advance of those numbers, but a look at a daily chart shows some compelling price action unfolding in MHK right now:
Mohawk Industries (MHK) 11/16/17 – 4/17/18. Mohawk (MHK) daily price chart.

Source: OptionsHouse

Coming off its record highs from late 2017, in early April the stock dropped to its lowest low in more than a year, but then quickly made a few moves that suggested April 2 has the potential to be at least an intermediate-term bottom.

Two days after that low, MHK posted a wide-range up day that pushed the stock to its highest level in more than a week (and, coincidentally, almost completely reversed the wide-range down day that occurred five days before the low). High-volatility days—which is what a wide-range day is—that close counter to the prevailing trend can sometimes indicate momentum is shifting in the other direction, especially if prices don’t quickly take out the day’s other extreme (in this case, the low of the wide-range up day).

As of yesterday, that hadn’t happened. In fact, the stock was doing the opposite, forming an increasingly tight consolidation with a distinct upside bias. Also, the weekly chart below shows the early April low brought prices back to a trendline connecting the stock’s two most significant pullback lows from the past two-plus years.

Mohawk Industries (MHK) 3/2/09 – 4/17/18. Mohawk (MHK) weekly price chart. Pullback to trend

Source: OptionsHouse

Continued strength in the housing sector could also work in MHK’s favor, potentially supporting the idea that the stock is concluding a pullback rather than embarking on a downtrend. (Housing starts and building permit numbers released yesterday both comfortably beat estimates, by the way.) Also, recent analysis has applauded Mohawk’s fundamental strength, including its track record of successful investments, and its current “pent-up” revenue and earnings growth.1

With eight more trading days until MHK releases its Q1 numbers, there’s plenty of time for traders to position themselves for this event. Mohawk has beaten earnings estimates in 16 out of the past 20 quarters.

When several potentially price-moving factors—options activity, favorable analyst notices, looming earnings, signs of price reversal—come together in a stock trading in a narrow range, it can pay to keep an eye on your trading screen.

Tariff Watch: Just when you thought it was safe to go back into the trade waters, yesterday China announced it was slapping a 179% duty on US sorghum exports—a nearly $1 billion market. Trade tensions have widely been seen as easing over the past week or so, but this latest volley suggests the story isn’t over yet.

 

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1 Barron’s. Why Mohawk Industries Shares Could Rise 38%. 4/10/18.