Momo Stock Could Have a Monster Month

The stock is trading near a trendline with historically bullish implications

Aug 15, 2018 at 11:06 AM
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U.S.-listed Chinese tech stocks are taking a hit today on negative earnings reaction for Tencent. One name selling off is mobile messaging app maker Momo Inc (NASDAQ:MOMO), last seen down 4.9% at $35.13. Nevertheless, this could be creating an intriguing trade opportunity, with the equity pulling back to a trendline that's marked attractive entry points in the past.

Specifically, MOMO is now trading within one standard deviation of its 200-day moving average. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been three other times in the last three years that the equity has pulled back to this trendline after an extended period of time above it, and the post-signal returns are encouraging.

For instance, one week after a signal, MOMO stock has averaged a gain of 5.97%, with a 100% win rate. Widening the scope to 21 days, or one trading month, Momo was up 10.13%, on average, with two-thirds of those returns positive. Based on its current perch, another move of this magnitude would put the shares back near $39.

momo stock daily chart on aug 15

Supporting the theory of a near-term bounce is the fact that MOMO shares are currently oversold. Following a nearly 35% plunge from its mid-June record high of $54.24, the security's 14-day Relative Strength Index (RSI) was most recently seen at 28.28 -- its lowest reading since Dec. 1, which preceded a more than 140% rally to that recent peak.

What's more, Momo is scheduled to report earnings before the market opens next Wednesday, Aug. 22. The stock has averaged a next-day gain of 12.1% following the company's last two turns in the earnings confessional.

Those looking to bet on a repeat of history may want to consider Momo call options. The stock's 30-day implied volatility skew of 5.4% ranks in the 86th annual percentile, meaning short-term calls are pricing in lower volatility expectations than their put counterparts.

Plus, MOMO stock's Schaeffer's Volatility Scorecard (SVS) is docked at an elevated 76 out of a possible 100. This indicates the equity has tended to make outsized moves over the past year, compared to what the options market has priced in -- a boon to potential premium buyers.


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