Why Chewy’s Stock Looks Set To Soar If History Repeats

On Oct. 25, Chewy, Inc (NYSE: CHWY) broke up from a bull flag pattern on the daily chart that Benzinga called out the trading day prior. The stock then shot up 19% higher over the following six trading days before topping out at $77.17 and entering into consolidation.

Chewy’s rise higher has been completely technical as the company hasn’t had any recent news and isn’t expected to print its next earnings results on Dec. 7 after the closing bell.

Options traders were mixed on Wednesday with two traders purchasing bullish calls and two traders buying bearish puts. The amount of money across the trades was heavily skewed bearish, however, with $1.18 million spent on the put contracts compared to just $118,750 in calls. Chewey’s chart looks bullish, however, if history repeats.

The Chewy Chart: After breaking up from the first bull flag, and reversing course into an uptrend, Chewy has settled into a second bull flag pattern on the daily chart. The pole of the pattern was created over three trading days between Oct. 28 and Nov. 1 and the flag has been created between Monday and Wednesday.

The measured move, if the pattern is recognized, is equal to the length of the pole as a percentage, which in Chewy’s case is about 8.5%. If Chewy breaks up from the flag on high volume, this means the stock could rise toward the $79 mark.

Chewy has a gap above that was left behind on Sept. 2 following a bearish reaction to quarterly earnings between $81.37 and $86.60. Gaps on charts fill about 90% of the time, so it’s likely Chewy will trade back up into the range in the future.

The consolidation this week has helped to cool Chewy’s relative strength index (RSI), which was registering in hot at 69% on Oct. 28. When a stock’s RSI nears or exceeds the 70% level it becomes overbought, which can be a sell signal for technical traders. The stock’s RSI now sits at a much more comfortable 59%.

Chewy is trading above the eight-day and 21-day exponential moving averages (EMAs), with the eight-day EMA trending above the 21-day, both of which are bullish indicators. The stock is also trading above the 50-day simple moving average, which is bullish but the 50-day is curling down and bullish traders will want to watch Chewy doesn’t fall below the indicator.

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Bulls want to see big bullish volume come in and break Chewy up from the bull flag pattern and make a higher high to confirm the uptrend is still intact. The stock has resistance above at $75.89 and $77.17 and $81.37.
Bears want to see big bearish volume come in and force Chewy to negate the bull flag pattern by losing the eight-day EMA as support. The stock has support below at $71.71 and $67.76.
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