The Technical Level that Could Save Broadcom Ltd (AVGO) Post-Earnings

Apple Inc. (AAPL) supplier Broadcom Ltd (AVGO) has a promising technical setup ahead of tonight's earnings report

Dec 8, 2016 at 11:23 AM
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Chipmaker and Apple Inc. (NASDAQ:AAPL) supplier Broadcom Ltd (NASDAQ:AVGO) is gearing up to report its fiscal fourth-quarter earnings after the market closes tonight. In the meantime, AVGO stock is up 0.8% at $169.82. And while the stock is continuing its recent bounce from a historically bullish trendline, sentiment toward AVGO is already an near optimistic extreme -- suggesting the shares may struggle to repeat their positive post-earnings history.

Starting with the stock's technical backdrop, AVGO has added 17% in 2016, topping out at a record high just shy of $180 in August. Since then, however, the shares have been stuck in a sideways pattern in the roughly $160-$178 region. But AVGO recently pulled back to support at the 160-day moving average -- a trendline that has been following the shares higher since February.

According to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White, the stock has pulled back to this moving average four times in the past three years. At five days after this signal, AVGO has been positive 75% of the time, averaging a 4.9% gain. After 21 sessions, the average gain has grown to 7.8%, with AVGO positive 67% of the time.

AVGO Daily Chart December 8

Adding to the case for an impending move higher is the equity's history of positive post-earnings moves. Over the past eight quarters, AVGO has moved to the upside in the session after earnings seven times -- averaging a gain of 8.1%. The one instance over this period when the stock dipped post-earnings was in September, when the shares dropped 2.2% in the subsequent session. Overall, AVGO has averaged a 7.3% swing in either direction in the session subsequent to reporting, and options traders are currently setting their expectations right in line, pricing in a 7.4% move for tomorrow's trading.

While this analysis of AVGO's historic performance seems to suggest the stock is set to rally post-earnings, it must be noted that sentiment among analysts and traders is already very bullish. Of 27 brokerage firms following the stock, just one rates it a "hold" and none recommend selling. Plus, the average 12-month price target is docked in never-before-seen territory, at $204.70. That means it may be difficult for AVGO to get a boost from bullish analyst attention after earnings. Meanwhile, short interest on the stock fell by more than 10% during the most recent reporting period, and now represents just 1% of AVGO's total float -- indicating there's minimal buying power on the sidelines left to give the shares a lift.

Turning to the options pits, it's more of the same. Across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) speculators have purchased more than four AVGO calls for each put over the past 10 days. What's more, the resulting call/put volume ratio of 4.10 rests just 1 percentage point from an annual bullish high. And with peak open interest across all of Broadcom Ltd's (NASDAQ:AVGO) options residing at the December 175 call, with the 170 call not far behind, the shares could run into trouble at those overhead levels as the front-month expiration approaches.

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