Chewy Stock Flashing ‘Buy The Dip' Signals

Chewy (CHWY) has experienced a significant post-earnings pullback, dropping over 20% from its June 6 high, yet technical indicators suggest potential for a rebound. The stock is currently testing a historically bullish trendline and its 14-day RSI is in oversold territory, conditions that have previously preceded rallies. Additionally, rising short interest and an elevated put/call ratio point to short squeeze potential and a notable increase in bearish options positioning, with options currently appearing affordably priced.

Analysis

Despite a significant pullback of over 20% from its two-year high, including an 11% post-earnings drop, Chewy (CHWY) presents a compelling case for a contrarian rally based on technical and sentiment indicators. The stock is currently testing its 80-day moving average, a trendline that has historically preceded positive performance; a quantitative study shows that in six similar instances over the past three years, CHWY was higher one month later 78% of the time, with an average gain of 10.9%. This bullish technical setup is reinforced by a 14-Day Relative Strength Index (RSI) near 33, indicating an "oversold" condition that has previously coincided with price rallies. Furthermore, sentiment appears overly pessimistic, creating potential for a reversal. Short interest has risen 7.7% in the most recent period to 7.3% of the available float, signaling short-squeeze potential. In the options market, the 10-day put/call volume ratio of 0.68 sits in the 92nd percentile of its annual range, suggesting an unusually high level of bearish betting that could unwind. While options are priced cheaply with a Volatility Index (SVI) in the 7th percentile, the stock's low Volatility Scorecard (SVS) of 8 out of 100 implies it has consistently realized lower volatility than options have priced in.

Key Decisions for Investors

• Given the confluence of historically bullish technical signals at the 80-day moving average and oversold RSI, investors might view the current weakness as a tactical entry point for a potential rebound.
• The elevated short interest at 7.3% of the float and extreme pessimistic positioning in the options market suggest that investors should monitor for signs of a short squeeze, which could act as a significant catalyst for a sharp price increase.
• For derivatives traders, the combination of low implied volatility and a very low Schaeffer's Volatility Scorecard (8/100) indicates that selling options premium may be a more prudent strategy than buying calls, as the stock has historically failed to meet the volatility expectations priced into its options.
• Monitor the stock's ability to hold support at its 80-day moving average, as a sustained breach could invalidate the bullish thesis presented by the historical backtest.