​Trade Idea: Dow Stock Walgreens Looks Set to Drop This Month

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Short sellers have already been betting on more losses for Walgreens. Short interest on the stock ramped up by roughly 45% in the most recent reporting period, but only accounts for 3.4% of the equity’s float, writes Elizabeth Harrow.

Drugstore chain operator Walgreens Boots Alliance(WBA)) has received a lot of attention in recent months. Shortly after the stock was named as the official replacement for General Electric(GE)) in the Dow Jones Industrial Average (DJI), WBA shares suffered a body blow in late June on news that Amazon(AMZN)) was entering the prescription arena with its PillPack purchase.

WBA lost 9.9% during the June 28 session on that news, but then rallied back sharply and is now trading back above its pre-bear gap levels. However, the equity’s recent run-in with a couple of key moving averages suggests another leg lower is imminent in the short term.

Specifically, WBA is fresh off an unsuccessful test of overhead resistance at both its 160-day and 200-day moving averages. These two trendlines have been guiding Walgreens lower for over a year, as the pharmacy stock first broke below the duo as the result of a May 2017 bear gap.

Following a two-day closing streak above this trendline pair on Friday, July 27 and Monday, July 30, Walgreens shares are now trading back below these levels -- though they're less than one standard deviation from each moving average.

Looking back at past occurrences where WBA has rallied up to test resistance at these trendlines following a prolonged stretch below them, the short-term results going forward have been pretty consistently bearish.

There have been seven of these signals at the 160-day in the past three years, according to Schaeffer’s Senior Quantitative Analyst Rocky White, and WBA has been positive one month later just 29% of the time, with an average return of -2.82% for that period.

There have likewise been seven prior instances of WBA testing 200-day resistance over the past three years, and the results after these occurrences are even bleaker. Looking out 21 days, WBA is higher only 14% of the time, with an average return of -4.05%.

Short sellers have already been betting on more losses for Walgreens. Short interest on the stock ramped up by roughly 45% in the most recent reporting period, but only accounts for 3.4% of the equity’s float -- and has some room to keep growing before revisiting the 2012 highs for this metric. Given WBA’s latest rejection from stiff trendline resistance, these bears could grow bolder -- and continued shorting activity could create headwinds for the shares in the short term.

Traders looking for WBA’s latest rejection at its 160-day and 200-day moving averages to play out in the form of additional downside may want to consider short-term put options. Trade-Alert data shows the stock’s 30-day at-the-money implied volatility at 22.8%, which registers in the tame 36th percentile of its annual range. These modest volatility premiums mean that traders can enjoy relatively greater leverage, and reap the fuller benefits of another WBA decline.

View Schaeffer’s Investment Research for stock and options ideas, options education, and market commentary here

This article was originally published by MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.

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Symbol Name Price Change % Volume
GE General Electric Company 12.50 0.05 0.36 2,581,986 Trade
AMZN Amazon.com Inc. 1,912.16 15.96 0.84 473,263 Trade
WBA Walgreens Boots Alliance Inc. 67.05 0.57 0.86 209,634 Trade


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