Check-Engine Light Flashing Ahead of TrueCar Earnings

TRUE stock has been on a tear, but could cool off soon, if past is prologue

May 7, 2019 at 1:06 PM
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Auto pricing concern TrueCar Inc (NASDAQ:TRUE) will report first-quarter earnings after the close on Thursday, May 9. Ahead of the event, the shares of TRUE have been in rebound mode, and haven't ended a session lower since April 24 -- nearly two weeks ago. However, the equity is now facing off with a familiar trendline, run-ups to which have acted as sell signals in the past.

April 24, in fact, marked a nearly two-year low of $5.95 for TrueCar shares. Since then, the security has advanced roughly 19%. However, TRUE is now staring up at multiple layers of potential resistance, including the $7.28 level, which is half the stock's Sept. 21 high of $14.55. In addition, the overhead $8.50 level is where TRUE shares landed after a post-earnings bear gap in February, and could now act as a speed bump.

Plus, as alluded to earlier, TrueCar stock is back within one standard deviation of its 70-day moving average, after a lengthy stretch below this trendline. In the past three years, there have been six similar run-ups to this moving average, after which TRUE was lower a month later all but once, averaging a loss of 11.8%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. From the equity's current perch at $7.08, a similar drop would place the shares around $6.24.

TRUE stock chart may 7

It's also worth noting that TRUE stock has moved lower the day after five of its last six earnings releases, including the aforementioned one-day drop of nearly 25% back in February. Over the past eight quarters, the equity has averaged a one-day earnings reaction of 14.6%, regardless of direction. This time around, the options market is pricing in a slightly bigger 16.6% swing for TRUE shares.

As far as direction, options players seem to be betting on more upside for the stock. Amid the equity's impressive win streak, TRUE has racked up a 10-day call/put volume ratio of 47.11 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In other words, speculators have bought to open more than 47 TrueCar calls for every put in the past two weeks.

However, some of the recent call buying -- particularly at out-of-the-money strikes -- could be attributable to spooked short sellers seeking an options hedge. Although short interest plummeted more than 30% during the most recent reporting period, these bearish bets still account for nearly 17% of TRUE's total available float. In fact, it would take shorts nearly 13 sessions to repurchase their pessimistic positions, at the stock's average pace of trading.

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