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Chewy is Setting Up for a Big Move

A rectangle pattern has emerged in the chart of Chewy (CHWY). If the stock breaks through this pattern, a breakout or a breakdown is expected. Read more to learn how to profit from this set up.

A rectangle pattern has formed in the chart of Chewy Inc. (CHWY). When this pattern is broken, a breakout or a breakdown is expected.

CHWY is an online destination for pet parents. The company provides pet food and treats, pet supplies and pet medications, other pet-health products, and pet services. Through its website and mobile applications, it offers Dry Food, Wet Food, Prescription Food, Human Grade, Food Toppings, and Frozen Food among others.

The company performed well during the pandemic, with its stock soaring over 200% last year. The switch to e-commerce provided a tailwind for the company. Even as the economy has been opening back up, both e-commerce and the U.S. pet market is expected to grow, which should benefit the company.

CHWY has a current ratio of 0.9, which means its current assets are lower than its current liabilities. From a liquidity standpoint, that’s a concerning figure. The company also has a negative profit margin.

Sales were up 51.1% in the most recent reported quarter and earnings were positive for the first time. The stock is trading at a very high multiple though, with a forward P/E over 1,400. The stock hit a high earlier in the year, but started trending downward since March. It has shown mixed performance since.

Take a look at the 1-year chart of CHWY below with added notations:

  Chart of CHWY provided by TradingView

CHWY had been in a steep decline going into the beginning of March but has since moved into a sideways trading range. While in the range, the stock has formed a resistance level at $88 (red), and a level of support at around $76 (green).  At some point, the stock will have to either break the resistance or the support.

The possible long position is on a breakout above $88. The ideal short opportunity would be on a break below $76.

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Christian Tharp, CMT

@cmtstockcoach


CHWY shares fell $0.64 (-0.83%) in premarket trading Wednesday. Year-to-date, CHWY has declined -15.13%, versus a 10.42% rise in the benchmark S&P 500 index during the same period.



About the Author: Christian Tharp

I am an expert stock market coach having helped over 4000 beginner and advanced traders & investors from around the world take control of their financial futures. I also write stock market related articles for the Adam Mesh Trading Group and Yolo Publishing.

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