Play ALLY Stock's Rally While Options are Cheap, Says Signal

An extended short squeeze could also boost Ally Financial shares

by Lillian Currens

Published on Mar 1, 2019 at 12:34 PM

Ally Financial Inc (NYSE:ALLY) stock has been in rally mode of late -- up roughly 30% from its Dec. 26 low of $20.61. The consumer lending concern is now directly below its year-over-year breakeven and testing a familiar ceiling at the $27.50 area. However, ALLY just sent up a bullish signal that, if history is any indicator, could point to a breakout above this recent area of resistance. 

ALLY just came within one standard deviation of its 30-day moving average, after an extended period above the trendline. This signal has flashed five times before, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. The equity average a one-month gain of 6% after these signals, and was higher 80% of the time. At its current perch of $27, a similar move would rally the equity to roughly $28.62 -- territory not charted since last April's highs. 

ALLY Chart Mar 1

In response to ALLY's recent rebound, short interest fell almost 19% in the two most recent reporting periods, now covering only 2.3% of the stock's available float. However, it would still take almost four days for bears to buy back these pessimistic positions, at the equity's average pace of trading, leaving some room for a short squeeze. 

What's more, Ally Financial's Schaeffer's Volatility Index (SVI) of 22% stands higher than only 8% of all other readings from the last year, indicating that near-term options are pricing in relatively low volatility expectations. In other words, now might be the time to play ALLY's next leg up while short-term options are on sale. 

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