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Of all the companies out there, none of them seem to rise and fall on political rhetoric as much as Smith & Wesson Holding (NASDAQ: SWHC). This is not meant as a political statement nor is it suggested that mass shootings are something to take lightly, but Smith & Wesson stock as an investment is completely subjected to the shifts in the ongoing gun-control debate.
After the tragedy in Orlando in the early morning hours of Sunday, June 12, Smith & Wesson stock jumped almost 7% higher when trading resumed on Monday. The stock did fall back over the next few days as the initial reaction was muted to some degree. Smith & Wesson stock jumped again after the company’s earnings release, but that rally has also stalled and it stalled at critical level on the daily chart.
Looking at the chart, we see two blue circles marking the high in January and the high over the last couple of days with both happening right around the $26 level. In both instances Smith & Wesson stock rose intraday above the $26 level, but could not close above it. In January the stock closed at $25.86 and then yesterday it opened at $25.84. Interestingly enough, when the stock gapped lower in April, it opened at $25.91. The blue line shows the proximity of these three events.
We also see on the chart that the daily stochastic readings have just performed a bearish crossover while in overbought territory. These last two times this has happened, Smith & Wesson stock has fallen over the ensuing days.
The weekly chart shows another development that leads me to believe Smith & Wesson stock might be vulnerable. The stock had formed an upward-sloped trendline from the beginning of 2015 and I highlighted that trend in an article in this same space back in April. The most recent dip in the stock took the price down below that trendline on a temporary basis. We also see the same blue line that we saw on the daily chart.
In the article back in April, I pointed out how Smith & Wesson had a modest short interest ratio of 2.67. I was surprised to see that the ratio had jumped to 7.25 in mid-June, but after further investigation, it turns out that the number of shares sold short has declined. What this means is that the short interest ratio has jumped because the average daily trading volume had been declining prior to the mass shooting in Orlando, at least compared to the average daily trading volume back in April.
With Smith & Wesson stock stalling at the $26 level once again and with the additional event of the gap lower in April, I look for the stock to fall in the coming weeks. The daily stochastic readings being in overbought territory and making a bearish crossover just adds to my bearish stance for the short-term. If Smith & Wesson stock moves below the trendline again, we could see a dramatic drop in the stock price. I would look to short the stock above $25 with a downside target of at least $21.
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