The Big Picture Is Still Bearish for MMM Stock

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The woes for 3M Company (NYSE:MMM) and MMM stock began long before the novel coronavirus arrived to wreak havoc. Despite a booming stock market and a healthy economy, the Minnesota-based conglomerate saw its share price peak in early 2018 and fall as much as 45%.

mmm stock

Source: JPstock / Shutterstock.com

Then a global pandemic appeared to add insult to injury. MMM stock tumbled even deeper into the abyss.

Thankfully for shareholders, the stock has participated in the broad market recovery over the past month and has reclaimed some lost ground. Today we’re taking a fresh look at the stock’s posture heading into next week’s earnings report.

 MMM Stock Charts

Source: The thinkorswim® platform from TD Ameritrade

The month-by-month dismantling of 3M’s once-glorious chart can be seen in all its fright on the weekly time frame. With the added selling pressure of this year’s drama, MMM stock ultimately fell as far as 56%. This year’s lows put it back to levels last seen in 2013, meaning some seven years of growth were wiped out.

Aside from two failed breakout attempts in the past two years, the descent in 3M shares has been reasonably orderly. The second breakout bid carried the stock into 2020 but was upended by a poor earnings report that sparked a multi-month downturn.

Moving averages are supporting sellers’ dominance with the 200-week, 50-week, and 20-week readings all cruising steadily lower. Additionally, the RSI indicator dropped to a new low during the last downswing, confirming an increase in bearish momentum.

The four-week rebound that carried the stock into this week was powerful, but it unfortunately didn’t change the trend structure. We’ve now returned to an old support zone that is likely to become resistance. The bounce wasn’t powerful to turn the RSI bullish either. It remains in the bear zone south of 50.

In sum, the weekly trend is down, momentum is increasing, and the recent rally looks like a shorting opportunity.

Source: The thinkorswim® platform from TD Ameritrade

The daily view does provide some room for optimism if you can set the bigger picture aside for a minute. Today’s rally has the stock potentially forming a higher pivot low at the rising 20-day moving average. At the same time, the RSI pushed into the bull zone during last month’s rally and is sitting above 50 right now. To improve their foothold, bulls need to lift MMM above the 50-day moving average and keep it there.

For me, $140 is the crucial line in the sand. If we break below it, all bullish bets are off. This is the eventuality I’d prefer to trade around given the bearish posture of the weekly.

Earnings Preview

I suspect the April 28 earnings announcement will be the catalyst determining if the daily uptrend or weekly downtrend wins the current tug of war. The numbers are being released next Tuesday morning and will provide investors with their first glimpse of how 3M has fared during what will likely be a challenging first quarter.

January’s report was a big miss with earnings per share coming in at $1.66 versus $2.13 expected. That means the company was already struggling with a stiff headwind even before Covid-19 upended the world.

Though the numbers may change, options traders are currently pricing in an $11 move by next Friday. That translates into an 8% pop or drop, with the bulk of the movement coming on Tuesday. Instead of building a volatility trade into the event, I’m sticking with my bearish-leaning idea if MMM stock takes out $140.

Since the binary nature of the upcoming earnings increases the uncertainty, let’s build a low-cost vertical spread. If you’re comfortable with the max loss, that gives you the flexibility of holding into the event.

The Trade: Buy the June $135/$130 bear put spread for around $1.50.

The risk is limited to $1.50 and will be forfeited if MMM sits above $135 at expiration. The reward is capped at $3.50 and will be captured if the stock falls below $130.

For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, he did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2020/04/the-big-picture-is-still-bearish-for-mmm-stock/.

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