With this weekend bringing one of the biggest sports weekends of the year, I thought it would be a great time to write about a sports-related company.
Luckily for me, Under Armour (NYSE: UA) appeared on my bearish scan the other evening.
When we look at the chart, it is easy to see why the stock made the appearance on the bearish list.
The 10-day RSI had hit an overbought level and reversed and the daily stochastic readings made a bearish crossover at the same time. And all of this happened as the stock hit resistance in the $73 range.
When UA hit $72.70 and reversed on Tuesday, it was the third time the stock has been turned away in this range in the last five months. The stock did hit a high of $73.42 in September, but sticking with the football theme, that appeared to be a false start. When the stock was rejected again in December, the dip didn’t last as long and it wasn’t as deep of a dip as what occurred in the fall. This could be a good sign for the UA bulls.
The sentiment toward UA is pretty bearish, which, from a contrarian viewpoint, is good news. The short interest ratio is a hearty 6.1, the put/call ratio is higher than 63% of the readings for the past year. Plus 19 of the 35 analysts following the stock rate it as a “hold” or lower.
With the bearish signal from this week, I would look to make a short-term bearish play on UA. However, I would use options to play the downside move as it takes less capital and the reward could be much higher.
After I closed the bearish trade, I would keep an eye on UA for an opportunity to the upside. With the sentiment being so bearish, the stock could make another run at the resistance and after being turned back three times, it could make a major move to the upside. Typically when a stock keeps hitting resistance, the more time the stock gets turned away, the bigger the move once it breaks through.
Once again, I would use options to make the trade due to the lower capital required and the greater reward if the stock makes a huge move. If you are more conservative, but still willing to use options, you might consider a straddle using the $72.50 strike puts and calls. If the stock gets turned away, the move to the downside should be big enough to make the puts profitable enough to give you a small gain on the overall trade. If the stock breaks through the resistance, the move to the upside and the gains on the calls could make the trade hugely profitable.
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