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Trade of the Day: Nuance Communications (NUAN)

This voice recognition software company should move up to $26 by mid-February


Recommendation: Buy NUAN below $23.00 per share for a $26 target by mid-February.

Options Alternative: Buy to open NUAN April 2013, 23.00 calls for $1.50 per share or less.

This week Nuance Communications (NASDAQ:NUAN) and Chrysler Group announced that Nuance’s Dragon Drive, an automotive-grade voice platform for the connected car, is now part of Chrysler Group’s new Uconnect Access services.  Uconnect Access is Chrysler’s cloud-based, hands-free, voice-activated texting mechanism. Considering the popularity of texting and the need to communicate while driving, this feature is possibly the most significant addition to a car model since the intermittent-windshield wiper.

To be sure, the  product is not in widespread installation or ubiquitous demand—at least not yet.

This fun new technology is not what the company is known for and does not represent a new flagship product. Long before the price of NUAN begins to reflect heavy adoption of this technology, the stock will likely have moved higher because of two more subtle factors. The first is that the company is accelerating earnings from its speech recognition products for the document management and healthcare industries, and the second is that the chart shows a price pattern that spells bullish opportunity.

The company’s last two quarters have shown significant improvement in profitability where the previous six quarters were essentially at break-even.  The most recent year-over-year report showed a twenty-seven percent increase in sales. Though the P/E ratio for NUAN is a tech-style high number at 35, the forward P/E ratio (which compares the projected revenue to the current price) is a healthy 10, leaving institutional investors a lot of elbow-room to justify adding it to their portfolios.

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The price of NUAN has had a history of significant moves.  It made no less than six moves of 20% or greater in the past year. These moves, whether up or down, generally took about two months to complete.  The current price action features a price pattern that indicates the next big move could occur in the short term (see figure).

An inverse head-and-shoulders pattern indicates the possibility of a trend change in the price from bearish to bullish. It features a triple-bottom where the middle portion of the pattern drops lower than the other two nadirs. The price made its first move above the neckline of this pattern (the nearly-horizontal line drawn on the chart) in a breakout-and-retest fashion. Though the most recent two candles did dip lower into the $22 region, the price held support and closed Monday at $23.00 even.

This price pattern has a price target built into it based on the distance from the neckline to the lowest point in the middle trough. On the chart for NUAN that distance is about $3.00. The time frame of the entire inverse head-and-shoulders pattern comprises about three months. If the pattern completes successfully, NUAN should end up around $26 midway through February.

Recommendation: Buy NUAN below $23.00 per share for a $26 target by mid-February.

Options Alternative: Buy to open NUAN April 23.00 calls for $1.50 per share or less.

To take advantage of this pattern, traders can buy the stock below $23 or they can use an option play. A February option will get past earnings, but if the earnings announcement on February 4th produces a temporary drop, then a trader would need more time for the move to complete.  An April option should provide that extra time and flexibility.

The February deadline also corresponds with some easy-to-anticipate headlines about the U.S. debt ceiling that should appear in late January and early February. This period of time might produce a quick run up in prices and another quick drop thereafter. Should the price of this stock hit $26 before the earnings report, traders might consider taking profit and looking for a re-entry point as the stock swings lower afterwards. Of course those who exit early would take the risk that the price could travel much higher after earnings if the news were better than expected.

John Jagerson and S. Wade Hansen are co-founders of, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

Article printed from InvestorPlace Media,

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