Shares of package delivery giant United Parcel Service (NYSE: UPS ) had an explosive rally following the company's July earnings report. Since then, however, UPS stock has been stuck in a consolidation period that now looks increasingly likely to resolve to the upside.
Before looking at the specific trade idea, allow me to say a word on the seasonal "patterns" for the U.S. stock market in the month of August. This vacation month has a strong tendency to be binary, in the sense that it is either boring and quiet or volatile like crazy.
Why this binary tendency you ask? With so many people out on vacation markets can be quiet. However, if unexpected big news hits, it can get people scrambling to adjust positions, and that in turn spikes volatility more than normal.
In the "quiet" scenario, there is also a good chance that stocks at least marginally melt higher, which is where this trade in UPS stock could make sense.
UPS Stock Charts
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Moving averages legend: red - 200 week, blue - 100 week, yellow - 50 week
On the multiyear weekly chart, we see that the longer-term uptrend remains intact … supported by a simple trend line as well as the red 200-week moving average. The recent post-earnings rally has pushed the stock back to the upper end of the trading range, if we for a moment ignore the overshooting rally from January 2018.
At this juncture, the stock either falters or it pushes back above simple horizontal resistance to make another run at the 2018 highs. I assign the latter scenario a higher probability for the time being.
Click to Enlarge
Moving averages legend: red - 200 day, blue - 100 day, yellow - 50 day
On the daily chart, we see that since the post-earnings rally from July 25 UPS stock has trotted sideways in a tight and well-defined range that the bulls may call something like a bullish wedge or bull flag pattern. The exact name here hardly matters - the stock is simply consolidating after a strong one-day move and right at critical multiquarter horizontal resistance around the $120 area.
The trade here is straightforward; A break and hold above $121 on a daily closing basis and thus out of the tight consolidation pattern would trigger a long-side trade with a first upside target at $127. This would also fill the stock's down-gap from Feb. 1. Any strong one-day bearish reversal on a daily closing basis would be a stop loss signal from a swing trading perspective.
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