Overbought pressures are taking their toll on stock indices. Many are dithering near resistance amid profit-taking from traders looking to harvest gains following the past month’s gargantuan gains.
Fortunately for stock bulls, the giveback has been mild, providing attractive breakout setups across the board, and one such beauty is Paychex, Inc. (PAYX).
The New York based payroll services provider’s chart is eye candy for technicians.
Since breaching 10-year resistance at $46 back in 2014, PAYX stock has continued trending higher in bullish fashion. Volatility has accompanied Paychex through much of 2016.
After diving some 12% in January, shares have galloped higher reclaiming all that was lost.
With order now restored, PAYX sits above all major moving averages and has returned to a pivotal resistance level at $54.50. This zone halted numerous rallies last November and December. But with the strength supporting its current run a breakout seems inevitable.
The search for a proper target in Paychex requires taking the long view of its chart. At the height of the dot-com bubble PAYX stock, which calls the Nasdaq home, notched an all-time high of $61.25. A re-test, and hopefully breach, of the prior peak is just a matter of time. At its current perch, PAYX sits a mere 13% away.
The cup-and-handle pattern that defines the past three months of trading in the stock suggests an eventual rise to the low $60s is altogether doable.
One monkey wrench worth mentioning is the earnings announcement slated for Wednesday morning. Obviously, disappointing earnings could upset the beautiful breakout setup.
Barring that, the future looks bright for PAYX.
Get Paid With a PAYX Stock Option Play
With earnings looming, option premiums are running on the high side, making a straight call purchase expensive. To reduce the cost, not to mention the risk, consider entering a bull call spread instead.
Buy the June $55/$57.50 call spread for 88 cents or better. The risk is limited to the initial debit and will be lost if PAYX stock price is below $55 at June expiration.
The reward is limited to the distance between strikes minus the net debit, or $1.62, and will be captured if Paychex can rise above $57.50 by expiration.
By risking 88 cents to capture $1.62, the trade offers an eye-popping 184% return.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.
