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Reluctant Short-Meisters (EBAY)

Posted on August 30, 2020

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 16th 50/55 CALL spread for $2.66 (+$5.25/-$2.59) and buy two (2) EBAY October 16th 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

2 responses to “Reluctant Short-Meisters (EBAY)”

  1. M T says:

    At this point anything defined risk works to take the pressure off my pesky short calls.

    Also, must confess to secret salivations at one day seeing these mighty techs laid low…my grandpappy spoke with awe of the spanking something called “the nifty fifty” received not long after their ascendency…

    Credit of 28 on entry, good luck y’all

  2. Hugh L. O'Haynew says:

    bs’d
    I heard that, MT!
    In the office we call them the DANG FAANGS (and sometimes a lot worse).
    May the Heavenly Regulator be moved by the yearning DRIP, DRIP, DRIP of your salivations! 😜😜😝😝
    Huey

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