Dick’s Sporting Goods (DKS – Get Report) reported quarterly earnings before the market opened on Tuesday. Both earnings and revenue missed Wall Street’s estimates, and the company issued a gloomy fourth-quarter forecast. As a result, the stock lost 9.4% Tuesday. Even though the company’s guidance was particularly disappointing, the selloff was likely an overreaction.
It is common to see exaggerated price movement after disappointments in earnings, and the chart for Dick’s Sporting Goods shows many signals that the stock will reverse higher.
The first noteworthy technical trend began even before the company reported earnings. The price trended below the lower Bollinger Band, which often foreshadows a correction back into the middle of the range. Note also the narrowing of daily ranges since late October, a Bollinger Squeeze. This often occurs before a big price move.
The price move on earnings day started with a large gap to the downside, but over the course of the session the stock moved higher, from just above $34 at the open to $36.96 at the close. This is bullish. Confirming this were two very strong signals. First was the extraordinary volume spike, which is exceptional when compared with the daily volume over the the past six months. Second was an equally dramatic move of momentum as measured by the relative strength index, which went more than 9 points into the oversold index range. Over the past six months this occurred only one other time, during the broad market’s drop on Oct. 24.
The signs are all bullish on the chart. So how we can use stock options to profit from the coming move higher? Consider selling the December 36 put option. It has 30 days to go before expiration, and it closed on Tuesday at a bid of 1.10. Selling this put option yields $101 (after deducting $9 for trading costs). If you agree that stock is likely to make up some of its loss on Tuesday, this short put is a sensible trade, and it carries the same market risk as a covered call.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.
Besides blogging at TheStreet.com, Michael Thomsett also blogs at the CBOE Options Hub and several other sites. He is author of 11 options books and has been trading options for 35 years. Thomsett Publishing Website