GILD Trendline Test Sends Up a Sell Signal Ahead of Earnings

Biopharmaceutical stock Gilead Sciences (GILD) fell hard and fast from its late-January peak of $89.54, which at the time was just short of a fresh two-year high. In fact, at its year-to-date low of $64.27, tagged in early May — which is now the reigning 52-week low — the shares were down more than 28% from those first-quarter highs. And now that GILD has recovered from its 2018 troughs around the $65 level, it looks as though now is an ideal time to bet on the stock’s next leg lower.

Specifically, GILD just rallied directly into its overhead 80-day moving average, which previously served as support in February and early March. Schaeffer’s Senior Quantitative Analyst Rocky White looked back at previous instances in the last three years where GILD traded up to within one standard deviation of its 80-day moving average after spending at least 60% of the time below it in the past two months, and at least eight of the last 10 trading days. There have been 13 of these signals, and the short-term returns following previous instances have been less than stellar.

In fact, GILD’s average five-day return following these 80-day resistance tests is a loss of 1.16%, with only 15% of the returns positive. And 21 days after a signal, the stock’s average return is a 2.46% drop, with only 25% positive returns.

It doesn’t help the stock’s case that the 80-day moving average is currently located just below the $72 level. This chart region acted as a floor for GILD in April and on the first trading day of May, just prior to a massive earnings bear gap on May 2. Since early June, GILD has made multiple attempts to take out the $72 level, but has yet to close back above this area. Meanwhile, $71.64 marks the stock’s year-to-date breakeven, which is likely adding to pressure in the region — and from a longer-term perspective, GILD is bumping up against its 80-month moving average, which previously cushioned the mid-2017 lows before switching roles to cap last month’s highs.

Despite GILD’s disappointing price action in 2018, there’s a distinct lack of pessimism toward the shares. Analysts have handed out 14 “strong buy” ratings, compared to one “buy,” eight “holds,” and zero “sells.” This top-heavy configuration leaves plenty of room for future downgrades to push the stock lower.

Elsewhere, short interest accounts for a nearly negligible 1.3% of the equity’s float, as relatively few bears are betting on additional downside. Likewise, data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows that speculative players have bought to open 3.74 calls for every put on GILD over the past 50 days — revealing a strong preference for bullish bets over bearish. In fact, this call/put ratio registers in the lofty 91st percentile of its annual range, as traders have rarely shown a greater skew toward calls over puts.

This combination of a pronounced downtrend, highlighted by stiff overhead resistance, and generally upbeat sentiment makes GILD an appealing candidate for a bearish contrarian play. Traders considering a put trade should be aware that the company is due to report earnings after the market closes on Wednesday, July 25, which is pushing option premiums higher in the weekly 7/27 options series.

To offset the impact of time decay, consider buying in-the-money options with more time to expiration — or more conservative traders may wish to wait and play the follow-through move post-event. For what it’s worth, Trade-Alert notes that GILD has closed lower the day after six of its last eight earnings reports.