ETFC's early October bottom coincides with its November 2007 lows
E-Trade Financial Corp's (NASDAQ:ETFC) drop off its Sept. 16 high near $46 can be described as "fast and furious," driven by a negative reaction to a "commissions race" among brokerages. More specifically, ETFC fell 4.8% on Sept. 26 when Interactive Brokers (IBKR) unveiled a commissions-free trading product, and then surrendered 16.4% on Oct. 1, after Charles Schwab (SCHW) said it would remove commissions for U.S-listed stocks, exchange-traded funds (ETFs), and options -- while a bruising double-downgrade at Barclays, which said the move to zero commissions would largely weigh on brokers' bottom lines, sent the stock down another 3.6% on Oct. 2. When the dust finally settled, the shares found themselves trading below $35 for the first time in 28 months, having suffered a roughly 22% haircut from that mid-September peak.
The stock's early October bottom near $35 is notable in that this level coincides with ETFC's November 2007 lows, and represents roughly half its 2018 high. The shares bounced off here, eventually closing out 2019 with back-to-back positive monthly returns, as well as a 3.9% fourth-quarter gain. While it's hardly unusual to see a stock rise amid a rally in the broader stock market, ETFC's encroachment on its 320-day moving average amid this bounce back is certainly worth mentioning.
Regular readers of this space recognize the 320-day trendline as an "under-the-radar" moving average we tend to favor, given its propensity to step in as support amid breaches of the more widely favored 200-day. ETFC has spent the past 14 months trading below its 320-day moving average, and closed out 2019 at $45.37, compared to an end-of-year close at $46.36 for its 320-day. Looking at the stock's two most recent tests of this trendline, neither one was successful, with the shares averaging a 21-day return of negative 16.11%. In other words, ETFC could be in for another period of sharp losses.
There are several other "red flags" waving on ETFC right now, namely the fact that the stock -- and its 320-day trendline -- are both currently located near that $46 level mentioned above. This area initially served as support in the first seven months of 2019, but has switched roles to serve as stiff resistance following a period in early August in which the shares surrendered nearly 12% during a four-day stretch of broad-market weakness. This $46 price point is also currently home to E-Trade's 40-month moving average, which hasn't been toppled on a monthly closing basis since July.
ETFC's open interest configuration could exacerbate trouble in this region. The stock's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 0.45 indicates near-the-money calls outweigh puts among options expiring in the standard January series. In addition to suggesting that relatively high expectations have already been priced into the stock by speculative players, this also effectively raises the likelihood of the shares encountering options-related resistance during the two-week period leading up to front-month options expiration.
But whichever direction you're anticipating ETFC to swing, it's certainly an attractive time to speculate on the stock's next move by buying options premium. The stock's Schaeffer's Volatility Index (SVI) of 26% registers in the low 14th percentile of its annual range, implying short-term options have priced in lower volatility expectations just 14% of the time over the last year.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 5.