Bear Signal Flashes for CHWY Stock Before Earnings

Chewy's last two earnings reports put the stock in the red

by Lillian Currens

Published on Dec 6, 2019 at 10:57 AM
Updated on Dec 6, 2019 at 3:10 PM

The shares of online pet supply retailer Chewy Inc (NYSE:CHWY) have been making several attempts to distance themselves from their late-November bottom near the $21 level. Just yesterday, the stock picked up a 6.3% gain on a mixed analyst note from Morgan Stanley, and continues to climb higher today -- up 1.6% to trade at $24.72, at last glance. However, this pop has CHWY pushing back up against its 40-day moving average, which has spelled trouble on the charts in the past. 

CHWY Chart Dec 6

According to data from Schaeffer's Senior Quantitative Analyst Rocky White, CHWY has experienced two similar run-ups to this trendline, and suffered negative one-month returns both times, averaging a whopping 17.01% dip. From its current spot, this would put the security at a new all-time low of $20.52. 

Taking a look at yesterday's analyst note, Morgan Stanley upgraded the equity to "overweight" from "equal-weight," but trimmed its price target to $30 from $34. The consensus 12-month price target is still incredibly high, perched all the way up at $35.45 -- a region not touched by CHWY since the stock went public back in mid-June. Sentiment is split, however, with six calling the equity a "strong buy" and six saying "hold."

At the moment, short sellers are firmly in control, with these pessimistic positions representing a hefty 31.8% of the stock's available float, and over a week's worth of trading at its average pace. That being said, long calls are exceedingly popular. In the past 10 days, 11,537 of these contracts have exchanged hands, with peak open interest sitting at the front-month December series at the 24-strike call. 

Those looking to bet on Chewy's next move with options will have to pay a premium. The stock's Schaeffer's volatility index (SVI) of 92% sits in the 74th percentile of its annual range. The spiked volatility can be attributed to the company's upcoming earnings report, set for after the close on Monday, Dec. 9. During its past two reports, CHWY averaged a loss of 6.4%, but this time around the options pits are pricing in a much bigger 15.1% swing. 

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