Seagate_LogoSeagate Technology (NASDAQ: STX), one of the largest manufacturers of data storage devices in the world,  is scheduled to release its first quarter earnings report before the market opens on Friday.

The company has seen its earnings forecast get ratcheted down over the last 90 days. The consensus estimate from analysts just 90 days ago was earnings per share of $1.27. Now it’s sitting at $1.04. That represents a decline in year-over-year earnings of 22.4%, if the Seagate earnings estimates are accurate.

Looking at the Seagate chart, you can see how the stock has been in a downward sloped trend channel over the last 3 ½ months, and how it is approaching overbought levels on the daily oscillators. The upper rail is still a little ways away, but the stock could potentially rally up to the upper rail before the earnings report on Friday. You should take note that the trend channel is formed more with opening prices and closing prices than with the intraday highs and lows.

STX-daily-chart

One advantage Seagate has going for it is that expectations have been lowered and the sentiment toward the stock is pretty bearish. The short interest ratio is currently at 6.0, while the put/call ratio is at 0.87, which ranks in the 51st percentile for the past year. Analysts aren’t big fans of the stock, with only 12 out of the 27 following the stock ranking it as a “buy.”

With Friday being an options expiration day, I decided to dig a little deeper into the options configuration to see where the biggest open interest levels are for the April options. Sometimes you will see a stock meet resistance at the site of the highest open interest calls, or see support at the highest open interest put level.

The writers of the options don’t want to see the contracts finish in the money so they can sell the stock short as it gets close to the call strike, or buy the stock as it gets close to the put strike. They aren’t necessarily trying to keep the stock from moving above or below the strike price of the options they sold, but they do this as a way of hedging their position. It is called “delta hedging.”

The highest level of call open interest for the April options is at the 53 strike. The stock is already trading above that price, so that should not impact the stock price come Friday.

On the put side, the 55 strike put is the peak open interest, with 1,870 contracts. Should the stock still be hovering around this price come Friday, the hedging at the 55 level could definitely come into play.

So how do you play Seagate? Personally, I wouldn’t touch it ahead of earnings. While the expectations are down and the sentiment is pretty bearish, the downward sloped trend channel makes me shy away.

After the Seagate earnings report is out and we see how the stock reacts, I would be looking at potential trades. If the stock moves up and is able to move above the upper rail of the channel, I would be looking to go long, as the bears may try to jump in and the short sellers may have to cover.

If the stock drops after the earnings report, I would look to buy it at the $50 level, assuming the level doesn’t get breached. The $50 level has been the site of support in the past.

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Published by Wyatt Investment Research at