Schaeffer's Trading Floor Blog

Chart to Watch: DreamWorks Animation SKG, Inc. (DWA) Tumbles Into a Trendline

DWA moves sharply lower following earnings report

by 2/26/2014 3:03 PM
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DreamWorks Animation SKG, Inc. (NASDAQ:DWA) is currently one of the most notable laggards on the Nasdaq Exchange, off more than 13% to trade at $30.61. Against this backdrop, the equity has been added to the short-sale restricted list. Sparking today's round of selling pressure was the studio's fourth-quarter earnings report, which fell shy of analysts' estimates. (On a year-over-year basis, DWA is still in the black by roughly 80%.)

DWA has pulled back to its lowest point since in about four months, violating its 20-week moving average. The shares bounced higher from this trendline in late October and were recently testing its mettle before today's gap lower. The 40-week trendline could rise to the occasion, however, and act as a near-term floor. A breach of the 40-week, on the other hand, could send the shares spiraling to six-month lows.

Weekly chart of DreamWorks Animation SKG, Inc. (DWA) since April 2013 with 20-week and 40-week moving averages

Although DreamWorks Animation SKG, Inc. (NASDAQ:DWA) swung to a profit in its latest quarter, revenue dropped 23%, coming in well below Wall Street's expectations. One notable box-office miss was the animated offering Turbo, which failed to live up to expectations with a $282.6 million haul worldwide.

Ahead of last night's earnings report, speculators had been stacking the deck on the bearish side. As of this morning, the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio stood at 9.14, meaning more than nine calls had been purchased to open for each put over the last two weeks. The ratio stands 3 percentage points shy of an annual peak, suggesting demand for long puts (relative to calls) has been near an annual extreme. For the sake of comparison, this same measure stood at 2.35 at the beginning of February.

Amid today's unusual price action, DWA options volume is elevated, at almost five times the typical intraday pace. Call options actually have a slight advantage over puts, although the three most active strikes are near- or out-of-the-money puts in the March and June series.

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