How Trendline Support Could Impact These 3 Stocks

Palo Alto Networks Inc (PANW), UnitedHealth Group Inc (UNH), and American Eagle Outfitters (AEO) have recently hit key trendlines

by Alex Eppstein

Published on Oct 22, 2015 at 3:17 PM
Updated on Jun 24, 2020 at 10:16 AM

While the broader market has been rallying of late, several stocks have been suffering pullbacks. That's not always a bad thing, though -- especially for opportunistic technical traders. Three names that have recently pulled back to key trendlines -- and could be poised to bounce higher -- are cybersecurity firm Palo Alto Networks Inc (NYSE:PANW), insurance issue UnitedHealth Group Inc (NYSE:UNH), and retailer American Eagle Outfitters (NYSE:AEO).

PANW recently breached its 200-day moving average, which has been a bullish signal in the past. Over the last three years, the stock has touched this trendline twice, and posted positive five- and 21-day returns both times. In fact, the shares' average gains during the respective time frames are 3% and 21.6%. That pattern looks like it's continuing today, with PANW up 3.1% at $164.70 -- bringing its year-to-date gain past 34%.

In the options pits, the tendency among short-term traders is toward puts over calls. This, according to Palo Alto Networks Inc's Schaeffer's put/call open interest ratio (SOIR) of 0.96 -- which approaches the top one-third of its annual range. Elsewhere, analysts are firmly in the bulls' camp, with 20 of 26 rating PANW a "buy" or better, and not a single "sell" opinion to be found.

UNH hasn't been as lucky on the charts today, down 5.8% at $111.31 -- but still clinging to a 10% year-to-date lead. If past is prologue, the shares could take a bounce off their 200-day moving average, which it's recently breached in the wake of poorly received earnings. Looking back three years, the stock has triggered this signal five times, and has posted gains 80% of the time over the ensuing week and 100% over a 21-session time frame.

If option traders have their druthers, UnitedHealth Group Inc will break from its historical pattern. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock has accrued a 50-day put/call volume ratio of 1.25 -- just 6 percentage points from an annual peak. Likewise, UNH's SOIR of 1.24 outranks four-fifths of comparable readings from the past year.

Finally, AEO recently touched its 320-day trendline, which has occurred four previous times over the past few years. Looking back, returns have been positive three-quarters of the time over a subsequent five-day span, with an average gain of 1.8%. Going out to 21 sessions, though, AEO actually averages a modest loss.

Today, American Eagle Outfitters is up 0.7% at $15.45, and has advanced 11.5% in 2015. Option traders have even higher expectations, based on the stock's 50-day ISE/CBOE/PHLX call/put volume ratio of 8.88 -- with nearly nine calls bought to open for each put. What's more, this ratio registers just 5 percentage points from a 52-week peak.

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