Trade of the Day: Caution Is Warranted in United Parcel Service, Inc.

UPS stock could deliver a bearish package

By Serge Berger, InvestorPlace Contributor

Shares of United Parcel Service, Inc. (NYSE:UPS), despite an impressive rally off the March lows, are now only higher by about 2.5% for 2017. Although the transportation stocks as a whole remain trending higher through the intermediate and longer term, in the near-term UPS stock, among others, is beginning to show some cracks that traders and investors alike should be aware of.

After United Parcel Service reported its latest batch of earnings last week on Oct. 26, the stock initially reacted positively. As we came into this week, however, the stock quickly reversed course and while not “broken” in any time frame is now dancing on thinning near-term technical support.

While UPS’s numbers for the third quarter were good and the company even raised its 2017 earnings per share outlook, to me the reaction to the news trumps the news itself.

On a group level and so you know, my proprietary trend-measuring algorithm earlier this week flipped the transportation stocks from near-term neutral to near-term bearish. Important however is to keep the context that despite the near-term bearish these stocks still remain intermediate and longer-term bullish.

In other words, for now any bearish trade in UPS is only a near-term one until my algorithms also flip these stocks to intermediate-term bearish.

UPS Stock Charts

Click to Enlarge

Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week

On the multiyear weekly chart note that the summer rally in UPS stock by early October finally had it push into the 2016 highs, where it began to stall. Through this lens the consolidating below technical resistance is constructive and ultimately could see a push higher again … unless the consolidation phase leads to a breakdown.

Click to Enlarge

Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day

To get a better idea on what the near-term movements may mean for UPS stock in the longer term note that the stock has had good support from its yellow 50 day simple moving average and that it is now visibly weighing on this line. The bearish reversal thus far this week in UPS stock follows last week’s initially bullish reaction to the latest batch of earnings, which shows that fund  managers are not chasing the stock higher but rather may be taking chips off the table.

What to do here very much depends on one’s time frames and positioning in UPS stock. Those long the stock from a near term perspective would be wise to respect the near-term bearish behavior and more aggressive traders could even consider buying some puts or put spreads in the name using December or January options. A break and hold below $117ish could lead to a net downside target closer to $114 and possibly followed by $110.

Check out Anthony Mirhaydari’s Daily Market Outlook for Nov. 1.

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