Trade of the Day: United Parcel Service, Inc. Is a Trend-Follower

UPS stock offers a good reward-to-risk buying opportunity after the recent drop

By Serge Berger, InvestorPlace Chief Technical Analyst

Shares of shipping companies United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX) took a hit two weeks ago when, Inc. (NASDAQ:AMZN) announced that it would begin testing its own last mile delivery service. As a result, particularly UPS stock has entered a critical technical confluence zone of support where active investors and traders may find buying opportunities.

To be sure, it’s nothing new … Amazon announces it will soon offer a new service and stocks in the affected industry suffer in fear of the behemoth cannibalizing said industry. While Amazon in my eye should never be underestimated, plenty of times the news does not mean that Amazon will immediately put all competitors out of business as much as it means that there will simply be one more competitor to the scene.

Case in point with Amazon’s announcement of its new shipping service. While this isn’t great news for companies like UPS and FedEx, it won’t put either company out of business.

As a side note and as also highlighted by JPMorgan in a recent research note, it’s actually a government agency, the United States Postal Service, that may not fare well with another last-mile competitor.

UPS Stock Charts

Click to Enlarge

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

Looking at the multiyear weekly chart of UPS stock, we see that its entire up-trend off the 2009 financial crisis lows has taken place in a wide but well-defined up-trending channel. In the first part of January, the stock rallied strongly along with the broader stock market, which pushed it back to the very upper end of this  longer-standing up-trend, where it promptly failed.

From this top, UPS stock fell so quickly that in only four weeks it managed to drop to the lower end of said trading channel. To put this in perspective, it previously took the stock eight months to climb from the lower end of the channel to the top end.

The lower end of the channel now also lines up with the red 200-week simple moving average to give all of this more support.

Click to Enlarge

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

On the daily chart, we see that the technical support on the above chart also lines up with horizontal support (blue box) and that the MACD momentum oscillator at the bottom of the daily chart is now dramatically oversold.

One way to take advantage of this current oversold signal in UPS stock with implied volatility in the options market high is by applying an options income strategy. To find out more about this high probability income strategy join me for a special free webinar on Tuesday for InvestorPlace readers. Register here.

From here, active investors and traders looking to apply directional strategies could buy UPS stock around the $106 area using a stop loss at $102 and an initial upside profit target around $115.

Check out Serge’s Daily Market Outlook for Feb. 20.

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