Reluctant Short-Meisters (EBAY)

We promised ourselves we wouldn’t touch online businesses during these certifiably loony Wuhan-era trading sessions.

Too risky, we argued, with all those additional lock-down revenues, all those rookie day traders buying stock without aforethought, all them buybacks in play again, and what! – the Fed cheerfully back-stopping the whole raving mess.

We all have our breaking points, friends…

Even we of otherwise stout will and carriage must eventually bend a knee and admit to having – here and there – our zero hour.

And so it is, with greater trepidation than usual, we open today with a discussion of old-time e-commerce favorite EBAY (NASDAQ:EBAY), whose shares we now believe have begun a southward sojourn.

SAFEGUARDS AND SURGICAL TOOLS

The EBAY platform does not sell the type of insurance programs that we at A Jew and His Money require to set a proper options bet.

So we sat down as a team, opened a bottle of Michter’s Single Barrel, and knowing well the dangers of expecting a “tech” titan of this rank to succumb to gravity, began might and main to drink.

Isn’t ‘the cloud’ an apt term, we mused, as the tipple took its toll – and not only for the technology invented, but also for the very puffy, ethereal nature of the stock prices associated with it.

Just get on with it!

Very well.

• EBAY trades with a trailing twelve month earnings multiple of 20.5x (a tad high),
• A Price to Book of 13.1 (tadder, still), and
• A dividend yield of 1.2% (meh).

Nothing so scrumptious there.

So we turn to the charts, where we find a prodigious preponderance of negative evidentiary poop –

Lots to unpack here, so let’s have at ‘em…

1. First, the stock is emerging from a pair of lengthy RSI overbought episodes (in red, at bottom) – and it’s emerging lower,
2. Next, both RSI and MACD have been diverging dramatically against price, an indication that bullish momentum has cratered.
3. RSI is sub-waterline bearish and MACD is but a few days from confirming with its own sub-waterline move.  Not healthy.
4. In just the last month, we’ve seen two price breaks below long-term bullish trendlines (red arrows), the latter of which occurred last Friday on heightened volume (in purple).
5. That break occurred directly after a bearish engulfing pattern (just in case you needed the knife twisted).
6. Price is now resting on its last line of support at 54 (in black);
7. Below that level, next support is found at the rising 137 day moving average at 45, just below
8. A gap that needs filling at 49 (in blue).

All told, a less than savory dining experience.

Look now at the weekly –

Here we have additional proof of buying crimes –

• To begin, weekly RSI was hairline overbought at the beginning of July (red circle) and has since diverged lower from price (in green), while
• MACD is also but a few days from rolling over.  Both of these signals are extremely bearish on a weekly chart.
• Add to that a stunning (weekly) bearish engulfing pattern (in blue), and you have all the makings of a “Let’s Pull the Pin on this Gym Class!” moment.

And that’s precisely what we’re planning.

First Fibonacci retracement calculation brings this sucker to 47.

A Jew and His Money recommends you sell the EBAY October 16^th 50/55 CALL spread for $2.66 (+$5.25/-$2.59) and buy two (2) EBAY October 16^th 50 PUTs for $1.31 each.  Total credit on the trade is $0.04.

Rationale: expecting EBAY to decline appreciably in the near term, we’re paying for two ATM PUTs with a short CALL spread (sell the 50 and buy the 55).

Maximum loss is the difference between the strikes minus the initial credit (5.00 – 0.04 = $4.96).

Maximum gain is unlimited.

It’s rare that a trade structured in this fashion offers two ATM PUTs to be purchased at no cost.

And we like that.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew