Shares of pet vaccination company Zoetis (NYSE:ZTS) are higher by roughly 30% for the year-to-date, but as a result, ZTS stock has also reached extreme overbought levels. Active investors and traders can eye ZTS stock for a mean-reversion move lower.
Currently, in the broader financial markets, many traders and investors are waiting for headlines from the upcoming G-20 meeting on June 28 through June 29. In particular they’re focusing on how conversations around the Trump-Xi meeting are coming along. This has markets on edge for the near-term, and in my opinion, makes dabbling in individual stocks rather risky as headline risk can force markets in either direction in the near term.
In situations like this where we have a known event coming where we don’t know the expected outcome, I am drawn to assets (stocks, indices, currencies or futures) that are measuring either notably overbought or oversold in the short term. Why? Because as you will see in the trade idea below, we can more clearly measure our risk and thus get better-defined reward to risk ratios for trade setups.
ZTS Stock Charts
First up is the longer-term look for Zoetis stock via the multi-year weekly chart. Over the years, ZTS has done a nice job working itself higher within a trading channel as marked by the two blue parallels. In other words, over the years, when the stock reached the upper end of the range, it would over time mean-revert lower and vice versa at the lower end of said range.
We see, however, that over the past few weeks investors have pushed ZTS stock above this longer-standing range in a vertical chaser rally. From a momentum perspective, as represented by the weekly MACD oscillator at the bottom of the chart, the stock is also getting notably stretched on the upside.
Simply put, the bet here is that history will prove itself correct and that ZTS stock is overbought right now. And the path of least resistance here points lower for the near term.
On the daily chart, we can draw another channel, this time of the year-to-date rally, which has ZTS stock at the upper end of the channel once again. From a momentum perspective too, same as on the multi-year look above, ZTS is overbought.
To be clear, none of my analysis is a call that this stock has to completely fall apart here. In fact, Zoetis stock is still trending higher. However, the stock is showing signs that it is severely overbought in the near-term, and my call is for a mean-reversion move lower in the stock to happen sooner rather than later.
One could go ahead and either short Zoetis stock around the $112 – $116 area with a downside target at $108. And you could use any further bullish reversal as a stop loss, or buy at the money puts or put spreads.
However, those market participants who want to dramatically increase their probability of a successful trade, there is a very specific yet simple options strategy one can place around this setup. I will explain this strategy in detail in a special free webinar for InvestorPlace readers. Register here for the free webinar.
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