Going Behind the Scenes on This Bullish STM Trendline

There has also been an excessive surge in short interest

by Bernie Schaeffer

Published on Jan 21, 2020 at 1:01 PM

The U.S. stock market ended 2019 on a high note, thanks in part to strength in technology stocks. The semiconductor sector, in particular, helped lead the Nasdaq Composite (IXIC) to its largest annual return since 2013, with the tech-rich index gaining 35.2% last year. One name from this group caught our attention this week -- Swiss chipmaker STMicroelectronics (NYSE:STM), which has blazed a path higher over the past five months to encroach on levels not seen since the early aughts.

While still holding near these highs, STM has consolidated these gains, and has pulled back to its 30-day moving average. This trendline has proven to act as support over the past three years, and most recently acted as a "springboard" for the shares at the start of the fourth quarter. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, previous pullbacks to the 30-day trendline by STM have yielded an average 10-day gain of 11.8%, with a 100% "win rate" (based on four occurrences in the past three years).

What's more, STMicroelectronics is pulling back to this rising trendline with implied volatilities at relatively tame levels. Specifically, the stock's Schaeffer's Volatility Index (SVI) of 37% ranks in the 35th annual percentile, which means front-month options have priced in lower volatility expectations just 35% of the time over the past year.

Meanwhile, this SVI is perched near its two-year historical average. White's modeling forecasts that an "average" two-week bounce from its supporting 30-day trendline could translate into a steep 295% return on a 10-day at-the-money call. That's almost quadruple the cost of entry!

Prospective call buyers may want to take note of the excessive surge in short interest on STM. Short sellers upped their bearish bets by 24.9% in the two most recent reporting periods to 6.33 million shares -- the most since early September. Should the shares keep climbing, an unwinding of these pessimistic positions could translate into more buying power for the stock.

Finally, there's room for upbeat analyst notes to draw more buyers to the outperforming stock. One-third of covering analysts still maintain a "hold" or "strong sell" rating on STM, even as it boasts a brow-raising 75% year-over-year gain. In the short term, a round of upgrades could keep the wind at the security's back.

stm daily chart jan 17

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, January 19.

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