Buy Calls on This Retail Stock's Dip

Short covering could keep the wind at GES stock's back

by Karee Venema

Published on May 3, 2018 at 12:28 PM
Updated on May 3, 2018 at 12:28 PM

It's been a rough stretch for retail stocks, with the SPDR S&P Retail ETF (XRT) currently staring at a 1.3% year-to-date deficit. Plus, according to data from Schaeffer's Senior Quantitative Analyst Rocky White, roughly half of the 87 stocks we track under the "General Retailers" umbrella are trading below their 80-day moving average. Nevertheless, there are still potential bullish trading opportunities within the sector, with Guess?, Inc. (NYSE:GES) among those sending up a possible "buy" signal.

Looking closer at the charts, GES stock has put in a strong outperformance in 2018, up 38%. The bulk of this upside came following a late-March earnings-induced bull gap, which sent the shares surging off a first-quarter floor near $14.50. The stock went on to notch a three-year high of $24.00 on April 12, and has since pulled back to support at its rising 20-day moving average.

guess stock price chart may 3

What's more, with Guess earnings not scheduled for release until Tuesday, May 22 -- after May options expiration -- front-month implied volatilities are low. GES stock's Schaeffer's Volatility Index (SVI) of 40% ranks in the 14th annual percentile.

This could point to a prime call buying opportunity, especially considering there have been just two other times since 2008 that the equity was trading near 52-week highs while its SVI was so low. According to Rocky's data, these previous signals resulted in an average 21-day rally of 5.56% for the security, and a 100% win rate. Based on its current perch at $23.28, another move of this magnitude would put GES north of $24.50 for the first time since August 2014.

Continued short covering could also create tailwinds for Guess stock. Although short interest fell 10.4% in the most recent reporting period, there are still 7.94 million GES shares sold short -- 13.6% of the stock's available float, and 4.5 times the average daily pace of trading.

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