On October 3, 2012 Meg Whitman (CEO HPQ) told analysts “It’s going to take longer to right this ship than any of us would like”. Following this announcement HPQ dropped 8.5% approaching a 9-year low and closing the session at $14.91. The next day saw a nice “dead cat bounce” closing the day fractionally higher than the previous day at $14.93. With the buyers failing to drive the price any higher the sellers clearly took charge of the stock for the next four straight days trading as low as $14.02 on October 10.
For me this is where the story gets really interesting. The next six sessions were all “up” days with one exception; the volume failed to materialize! For a stock as large as HPQ to trade higher it’s going to need lots of institutionally buyers behind it. There are 2 BILLION shares outstanding with institutions owning more than 70% of those shares. Where were the institutions to support their stock? The price patterns and volume patterns tell a story. The story is that buyers have driven the price back up to today’s close of $14.71, but they just aren’t buying share in bulk. Further evidence of a fading rally is that the stock closed at the high for today yet today’s volume was at the lowest point it has been for a month. Although buyers might be driving the prices higher, I suspect the buyers are smaller, retail traders which tend to be fickle, have limited trading capital to back their trade and go “all in” or “all out”. In an absence of a significant move higher I believe the institutional traders will stay on the sidelines or begin to sell into this rally causing it to fail.
Based on the chart evidence and my technical opinion that the stock will fail to achieve a price level greater than $15 and subsequently start to fall back towards the $14.02 trade achieved on October 10, I’ve set up a Bear Call Spread to take advantage of this technical trade selling the November 14 Call and buying the November 15 call for a net credit of $.58.
With 25 days remaining I am anticipating a bearish move in HPQ back down to the $14 level. The break-even point for this trade at expiration is $14.58* so I do have some price performance pressure for this stock to drop. I am using a conditional order that states that if HPQ trades at $15.01 or higher to close out the spread. $15 is not only a psychological resistance level, HPQ has not traded above $15 since 10/5/12 so a trade higher could signify that large buyers have entered the market and I’d be best to take my loss and move on.
If I was less confident in a downward movement but still felt that $15 was a significant resistance point I could have built the HPQ November 15 – 16 Bear Call Spread (selling the November 15 call and buying the 16 strike call) for a credit of $.27 and a maximum loss of $.63 with a break even of $15.27*. This would have allowed for a more neutral position with a higher probability of success but would have also adversely effect my risk/reward ratio.
*Commissions and fees not included in calculations.
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Rick and Shawn