Buy Calls to Bet on New ADP Highs

ADP stock hit a record high in early June

by Karee Venema

Published on Jul 3, 2019 at 10:38 AM

Automatic Data Processing (NASDAQ:ADP) stock took a sharp bounce off its 80-day moving average in early June, eventually topping out at a record high of $170.45 just three weeks later. The shares have since consolidated some of these gains, but are once again trading near this rising trendline -- suggesting ADP could be headed back to uncharted territory.

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, there have been eight other times in the last three years ADP has tested support at this trendline after trading above it for a lengthy stretch of time, defined for this study as 60% of the time in the past two months and in eight of the previous 10 sessions. The stock went on to average a one-month gain of 5.35%, with 100% of the returns positive.

adp stock daily price chart on july 3

Based on its current perch at $162.57, up 0.4% ahead of the Fourth of July holiday, another move of this magnitude would put ADP shares above $171 for the first time ever -- and could have some of the weaker bearish hands throwing in the towel. In fact, despite the equity's long-term uptrend, just 29% of covering analysts maintain a "buy" rating, and the average 12-month price target of $168.56 is a slim premium to current levels. A round of upgrades and/or price-target hikes could create tailwinds for the stock.

And while short sellers have already started buying back their losing bets, it would still take bears almost three days to buy back the remaining 3.43 million ADP shares sold short, based on the average daily trading volume. This suggests some sideline cash is still available to fuel bigger tailwinds for the shares.

Those wanting to bet on more short-term upside for Automatic Data Processing stock may want to consider using options. The equity's Schaeffer's Volatility Index (SVI) of 16% registers in the 10th percentile of its annual range, meaning near-term contracts are pricing in relatively low volatility expectations at the moment.


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