Looking at the weekly chart for Xilinx (NASDAQ: XLNX), I took note of two layers of resistance the stock is going to have to get through before it can move higher.
The first thing I took note of was the 52-week moving average of $43.25. The stock moved slightly above the trendline earlier this week, but then pulled back. Notice how the stock used the same trendline as support last spring.
After taking note of the 52-week moving average, I drew a trendline that connects the highs from the past year. That trendline is right at the $43.25 level as well. That will make it tough for Xilinx stock to move up without a pretty significant catalyst. The stock does have support down at the $36.50 range, so any slide could be halted there, or at least it might stall there.
Xilinx will announce its first quarter earnings results on April 22, so it is possible that the stock could use that announcement to break above the downward sloped trendline, or it could cause the stock to break below the support at $36.50.
The sentiment toward Xilinx has being growing more bearish of late. The short interest ratio sits at 3.6 right now, which is neither bullish nor bearish.
Something that did jump out, though, is that the number of shares sold short has jumped sharply since the first of the year. At the beginning of the year there were 6.39 million shares sold short. The latest report showed 11.6 million shares sold short.
Analysts are bearish toward Xilinx as well, as 18 of the 26 analysts rate the stock as a “hold” or a “sell.” Options traders have been adding more puts on the stock. The current put/call ratio stands at 1.9. That is higher than 90% of the readings for the past year.
Given the mixed signals toward Xilinx, with the chart pointing downward and the sentiment suggesting the stock could move higher, I wouldn’t touch the stock right now. However, given that earnings are coming up in less than three weeks, an options play might make the most sense.
Xilinx has been vulnerable to gapping after its earnings report. In January, the stock gapped down 8.2% after a disappointing earnings report. In October, the stock gapped 5% higher after beating earnings estimates.
Here is how I would play it. I would buy a straddle using the May 40 strike call and the May 40 strike put. At this time the call is $3.30 and the put is $1.30, so your total investment is $4.60.
This straddle has a slight bullish skew to it because the stock is currently trading just above $42, but I am OK with that given the extreme pessimism toward the stock. For this trade to be profitable, the stock will need to move above $44.60 or drop below $35.40. These two price levels are represented by the dashed line in the chart.
With the resistance points above, the support below and the earnings report looming, I think Xilinx stock will move sharply in one direction or the other over the next month and would give the straddle a good chance of working.
Take your Portfolio to the Next Level…
A level most investors would give their right arm to achieve. Because Andy Crowder’s doing what others might consider impossible… a truly outstanding record of winning trades. 227 trades – 202 winners. That’s a win streak of 88.9% – as good as you’re likely to ever get in this – or any – market. And now, for a very limited time, you can find out exactly how he does it – and how you can do it to. Click here now for complete details.