This commentary first appeared on Forbes Great Speculations, where Schaeffer's Investment Research is a regular contributor.
Pet retail stock Chewy (CHWY) hit a June 6, two-year high of $48.62, but since then has taken a more than 20% haircut, thanks in large part to a massive 11% post-earnings drawdown on June 11. After a brief rally from there, the shares have struggled, logging back-to-back weekly losses. The good news is that this pullback has CHWY testing a historically bullish trendline.
The stock is within one standard deviation of its 80-day moving average. For the purpose of this study, Schaeffer’s Senior Quantitative Analyst Rocky White defines that as the equity trading above the moving average 80% of the time over the last two months, and closing north of the trendline in eight of the last 10 sessions.
Per White’s data, six similar signals have occurred during the past three years. CHWY was higher one month later 78% of the time, averaging a one-month gain of 10.9%. From their current perch at $38.68, a move of similar magnitude would have the shares erasing their 9.3% quarter-to-date deficit and extending a 15.4% year-to-date lead. It would also place the security back in an uptrend channel from its 2025 peak and valley. Note CHWY’s 14-Day Relative Strength Index (RSI) is also drifting into “oversold” territory around 33, an area that preceded rallies back in the fall and spring.
There’s some exciting short squeeze potential to monitor as well. Short interest is up 7.7% in the most recent reporting period, and the 15.51 million shares sold short account for 7.3% of CHWY’s total available float.
There could also be an unwinding of bearish bets in the options pits. Chewy stock’s 10-day put/call volume ratio of 0.68 over at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) sits higher than 92% of readings from the past year. So while calls still outflank puts on an absolute basis, the high percentile means options traders have been much more pessimistic than usual.
Options are affordably priced at the moment, too, per our Schaeffer’s Volatility Index (SVI) of 38% that sits in the low 7th percentile of its annual range. A premium-selling strategy could be the move going forward, as CHWY’s Schaeffer's Volatility Scorecard (SVS) checks in at a 8 out of 100. This means the security has consistently realized lower volatility than its options have priced in.
