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United Parcel Service (NYSE: UPS) slumped 3.7% Tuesday following disappointing second-quarter results. In one day, enough technical damage was done to make the stock an interesting short selling candidate.
The package delivery company reported earnings of $1.21 per share, up 7% year over year, but missing estimates of $1.25. Revenue stood at $14.3 billion, beating the estimated $14.1 billion, as sales rose 6% versus the same period a year ago.
In terms of the outlook, UPS also disappointed. Management lowered its full-year earnings guidance to $4.90 to $5, from a previous range of $5.05 to $5.30, which was below the $5.09 analysts were looking for.
I have noticed an increasing number of companies have met or beat second-quarter estimates but then guided lower in their outlook. And like UPS, many of these stocks got punished as a result.
Whenever I see a stock in the transportation sector rally or falter, I quickly turn to iShares Transportation Average (NYSE: IYT) to see if there is a greater theme at work.
UPS is the fourth largest holding in IYT, comprising 7.3%, and thus, is able to move the ETF. To wit, IYT fell 1.3% Tuesday, and in doing so, worked off some near-term overbought readings and dropped to its 50-day simple moving average.
In the bigger picture, while IYT is still trending higher, the selling took it below its recent range in what could be the first sign that a move back to the late 2012 uptrend line is in order.
Turning to the weekly chart of UPS below, following Tuesday's move, the stock looks to at least be headed for a retest of its 2009 trendline.
When it comes to momentum oscillators, my preferred way to utilize them is to spot divergences between momentum and price. Particularly on multiyear charts, these divergences can give us early and powerful indicators as to the future direction of price. More often than not, when we see such divergences, price will follow the direction of momentum.
Above we see the stochastic oscillator topped in early 2013 while price continued to ascend. In other words, momentum topped about one year before price did.
On the daily chart below, note that Tuesday's 3.7% sell-off came on a huge spike in volume. On average, UPS trades roughly 2.3 million shares, but Tuesday saw close to 9 million change hands.
The stock gapped lower right out of the gate and immediately broke below its 50-day, 100-day and 200-day simple moving averages, almost as if they weren't even there. This is notable because the 50-day served as good support for several months prior, while the 200-day hasn't been violated since late 2012. In the same move, UPS also broke below its 2012 support line.
Although shares topped in late 2013, after an initial drop into February, they recovered nearly all of those losses by mid-July, before topping out at a marginally lower high.
Considering a lower high is in place and Tuesday's heavy volume sell-off that sliced cleanly through the 200-day moving average and 2012 trendline, chances are good that UPS has made an important top and selling will ensue.
Recommended Trade Setup:
-- Sell UPS short on a bounce back to $100
-- Set stop-loss at $103
-- Set initial price target at $94 for a potential 6% gain in 3-8 weeks
Many investors hold strong opinions about the 200-day MA... but is it actually important?