Previous pullbacks to PSTG's 80-day moving average have preceded major rallies
Data storage specialist Pure Storage Inc (NYSE:PSTG) has been a standout over the past year, from a technical perspective. The stock has gained 83% year-over-year, with key support coming into play from its 80-day moving average. And based on previous returns, now may be the time to trade the latest PSTG pullback to this key trendline.
Over the past three years, there have been three occasions where PSTG has pulled back to within one standard deviation of its 80-day moving average after spending an extended stint above this trendline, according to Schaeffer's Senior Quantitative Analyst Rocky White. For our purposes, that's defined as PSTG trading above its 80-day at least 60% of the time over the past two months, and at least eight of the last 10 trading days.
The five-day returns following these 80-day tests are not particularly compelling; they're only 67% positive, with an average return of 0.9%. However, 21 days after testing its 80-day moving average, PSTG is higher 100% of the time, and sports an average return of 13.7%.
From the stock's current perch at $20.22, a rally of this magnitude would place PSTG at $22.99. That's just north of the equity's reigning all-time intraday high of $22.60, which was set back on Feb. 27.
This time around, the PSTG bounce from its 80-day moving average could be accelerated by a short-squeeze rally. Short interest on the outperforming stock rose 10.2% in the most recent reporting period, and now accounts for more than 14% of the equity's float. At PSTG's average daily trading volume, it would take nearly a week for all of these bearish bets to be covered.
Meanwhile, with Pure Storage not scheduled to report first-quarter earnings until after the market closes on May 21 -- one trading day after front-month options expiration -- short-term calls on the tech stock are going cheap. Specifically, Schaeffer's Volatility Index (SVI) of 41% ranks in the 25th percentile of its annual range, as front-month at-the-money options have priced in lower volatility expectations only 25% of the time over the past year. In other words, now is an opportune time to bet on another 80-day bounce via the stock's short-term calls.