Time to Bet On A Rally From This Fast Food Stock

Wendy's stock is now trading near two historically bullish trendlines

by Patrick Martin

Published on Sep 25, 2018 at 11:41 AM
Updated on Jun 24, 2020 at 10:16 AM

Wendy's Company (NASDAQ:WEN) is up 1.4% to trade at $17.57 today, thanks to a bull note from BTIG, after the firm initiated coverage on the fast food name with a "buy" rating and $20 price target. This is a welcome sign for WEN stock, which had been trending lower in recent weeks. An extended rebound could be imminent though if history is any guide, with the stock now trading near two trendlines with historically bullish implications.

More specifically, Wendy's stock is now within one standard deviation of its 160-day moving average. Over the past three years, there have been eight other instances of WEN pulling back to this trendline after trading above it at least 60% of the time over the previous two months. Those prior signals resulted in an average one-month return of 4.09%, per data from Schaeffer's Senior Quantitative Analyst Rocky White, with 75% of the returns positive.

A similar trend has occurred with the security's 200-day moving average. In this instance, there have been six other times since 2015 the stock has pulled back to this trendline after a lengthy stretch above it, according to White. Those occurrences yielded an average one-month return of 3.42%, with 67% of the returns positive. Rallies of similar magnitude off of either trendline would put Wendy's stock back near its Aug. 20 11-year high of $18.68. 

Daily Stock Chart WEN

Another big bounce could also be fueled by a short squeeze. Short interest fell 3.5% in the last two reporting periods to 17.74 million shares, but that still represents nearly 10% of WEN's total available float, and more than seven days of pent-up buying power, at its average pace of trading. 

The fast food icon could also benefit from an unwinding of pessimism in the options pits. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity sports a 10-day put/call volume ratio of 5.02. Not only does this show that long puts have outnumbered calls by a five-to-one ratio, but it ranks in the 94th percentile of its annual range, indicating the rate of put buying relative to call buying is quite unusual.

Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.84 ranks in the 95th percentile of its annual range. This shows that short-term traders have rarely been less call heavy during the past year.

Those who want to bet on rally may want to do so with options. The stock has a Schaeffer's Volatility Index (SVI) of 22%, which ranks in just the 5th annual percentile. This reveals the security's short-term options are pricing in unusually low volatility expectations at the moment, a boon to potential premium buyers.

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