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“It’s not the people who vote that count. It’s the people who count the votes.” (GNRC)

Posted on November 12, 2020

Generac Holdings (NYSE:GNRC) is a manufacturer of generators, engines, alternators and other post-steam-power machinery for residential and commercial use.

They’re based in Waukesha, Wisconsin, and their fundamentals are outright fiendish.

To wit –

Price to Earnings is 47.8,

Price to Book is 11, and

They offer no dividend.

But it’s on the technical side that things look even more odious.

Here’s the daily chart since the March Batflu bottom.

Pay particular attention to the overbought RSI reading, both here, and on the chart that follows –

Impressive, no?  That 212% climb?

Thoroughly overdone, in our estimation.

  1. First, the stock has yet to work off the mid-August RSI overbought indication that brought about strong divergence from price (all in green).  That divergence is indicative of a loss in buying momentum.
  2. Next, price has climbed too far from her mid- and long-term moving averages, and now looks ready to give up on her initial, principal trendline (in red).
  3. Should that happen (as we expect it will, shortly), the next stop down could be either 173 or 136 – both simple Fibonacci retracement calculations and sufficient drops to cover one or both of the large gaps (in blue) that need filling, at 181 and 141.

The weekly chart also holds a warning for the bulls.

Take a look here –

Technical takeaway is as follows –

  • An RSI weekly overbought signal (in green) coupled with a daily is plain bad news.
  • And when MACD is poised to roll over, too – that only adds to the pessimism.
  • The post Batflu growth trajectory of the stock (in blue) has little to do with anything but government-sponsored capital injections.  It bears little to no relation to the company’s recent earnings growth.

In short, it looks very similar to a Pennsylvania vote count.

Because of the foregoing, and due to some very fortunate pricing, we’re recommending the sale of a CALL spread to purchase a PUT spread – with some very favorable parameters.

Like this –

A Jew and His Gold recommends you consider selling the GNRC November 20th 220/230 CALL spread for $4.70 (8.50/3.80) and buying the GNRC November 20th 230/220 PUT spread for $5.30 (8.50/3.20).  Total debit on the trade is $0.60.

Rationale: the trade is speculative because of the time frame involved.  We have one week, essentially, to see a two percent decline in GNRC’s price.

That will max out our profit at $9.40 (10.00 – 0.60).

Max loss on the trade is $10.60 (10.00 + 0.60).

Because the spreads are overlapping, we’ll see muted returns and losses between 220 and 230.

Above 230 we incur our max loss; below 220, our max gain.

Breakeven on the trade is $224.70 [current stock price is $225.29].

Many happy returns!

Matt McAbby

 

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