History Says to Buy Calls on CAR Stock

Previous pullbacks to CAR's 200-day trendline have marked buying opportunities

May 25, 2018 at 11:23 AM
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    Trade talk continues to swirl around the auto sector. This week, President Donald Trump threatened to impose new tariffs on auto imports, citing concerns over national security, even as China said it will lower its excise tax on vehicles and parts. Car rental name Avis Budget Group Inc. (NASDAQ:CAR) has proven resilient amid the back and forth -- pacing toward a healthy 1% weekly gain -- and with the stock trading near a trendline with historically bullish implications, it could be time to bet on its next leg higher.

    Specifically, since topping out at a near-term peak north of $50 in late April, CAR stock has pulled back to within one standard deviation of its 200-day moving average after spending a lengthy amount of time trading north of this trendline. In the four other times this signal has flashed over the past three years, the equity has gone on to average a 21-day gain of 10.83%, with two-thirds of those returns positive. Another move of this magnitude would put Avis Budget shares back above $47, based on their current perch at $42.49.

    car stock daily chart may 25

    The stock has already put in an impressive technical performance over the long run, boasting a nearly 90% year-over-year lead. Nevertheless, there's still plenty of skepticism priced into the shares. For starters, half of the analysts covering Avis Budget maintain a "hold" or "strong sell" rating. This leaves the door open for upgrades, which could draw more buyers to the security's table.

    An extended round of short covering could also create bigger tailwinds for the shares. Short interest dropped 15% in the most recent reporting period, but there are still 12.91 million CAR shares sold short. This represents a whopping 23.8% of the stock's available float, or nearly a week's worth of pent-up buying demand, at the average pace of trading.

    Those looking to bet on this CAR stock buy signal to play out once again may want to consider doing so with options. The equity's Schaeffer's Volatility Index (SVI) of 34% ranks in the 3rd annual percentile, meaning low volatility expectations are being priced into short-term contracts -- a boon to potential premium buyers.


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