FDX: The Bears Will Have Their Day in FedEx Stock

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Transportation heavyweight and economic bellwether FedEx (FDX) had been flying high as the last technical holdout in the weak iShares Dow Jones Transportation ETF (IYT) as recently as mid-June. But since delivering a weak earnings report, FedEx stock has taken a bearish course that’s setting up an opportunity for bearish traders.

FedEx stock FDX

Last month, FDX announced a profit miss and light revenues, and issued a weak outlook for the fiscal year ending in May 2016. It wasn’t all bad news, so we’re told. CEO Fred Smith stressed a confident management team and emphasized FedEx will continue to increase margins, cash flows and returns.

Also, analysts by and large have been coming to the company’s defense since the quarterly miss. One of the first to the scene, a Citigroup analyst on June 17 noted FedEx stock’s “very compelling value” as it’s executing well on its long-term plan, and estimates shares should climb to $205.

At the same time, S&P Capital IQ reiterated its “strong buy” rating on FedEx stock. Analyst Jim Corridore said FDX should trade up to $240 based on a 2016 P/E multiple of 22.2 that’s only modestly above the company’s 10-year average and considered reasonable based on their view FedEx can continue to “leverage incremental volumes and expand operating margins.”

More recently, analysts at Zacks were making the bullish case for FedEx stock, citing the company’s acquisition of Dutch-based TNT Express, which will help grow its European business; a three-year sponsor deal with UEFA; solid balance sheet and FedEx’s dividend increase.

FedEx Stock Weekly Chart

FedEx stock chart
Click to Enlarge
Source: Charts by TradingView

What the defiant price action in FedEx stock tells me (and which the FDX chart reinforces) is shares are going lower. A failure of FedEx stock to find a bid following multiple bullish analyst calls and nary a bearish cut on the name, coupled with a failed breakout from an aged fourth base, is a price warning for those that are willing to listen closely.

Currently, the failed late-stage fourth-base breakdown has resulted in a three-week-long bearish flag pattern that’s finding resistance from FDX’s 200-day simple moving average. Our technical assessment is that the short consolidation should ultimately resolve itself to the downside.

Based on pattern development in FedEx stock over the past month and change, as well as a long, unfettered uptrend, a correction of 20% to 21% seems doable. A move of that magnitude would constitute bear market territory for the broader market and is probably worthy of spooking a few bulls to rethink their position in a bellwether like FedEx.

Were this corrective decline to occur, it also lines up nicely with a 38% Fibonacci retracement level to act as potential technical support.

Net-net, that’s what I call a better value proposition, though I’m sure “the sky is falling” crowd would be warning loudly of doom and gloom in FedEx stock and shares being far from opportunistic at those technically grounded levels.

FedEx Stock Bear Put Strategy

FedEx volatility chart
Click to Enlarge
Source: Charts by TradingView

Volatility risk should be minimal and time decay isn’t a threat at this point with 88 calendar days to expiration. I like the fact this option will be active for FedEx stock earnings in September and positions for the market’s two weakest trading months.

If FedEx stock fails to cooperate technically, I’d use a money stop above $177 or a 50% stop in the option contract, whichever comes first.

If FedEx stock does begin to move lower, making an adjustment at key weekly chart support near $163.50 might be approached by reducing the contract count or moving into a vertical. While we’d still be looking for shares to reach $145 as a target, managing the trade along the way to reduce risk is always good policy.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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