PayPal Flashes Reliable Buy Signal Before Earnings

PYPL's pullback has stalled near key technical levels

PayPal Holdings Inc. (NASDAQ:PYPL) stock topped out at a record high of $121.48 in mid-July, before embarking on a weeks-long slide that had the shares logging three monthly losses in a row. This pullback may have created an intriguing trade opportunity on PYPL stock, though, considering the shares are now perched near a trendline that's marked attractive entry points for longs in the past.

Specifically, the equity is trading within one standard deviation of its 52-week moving average, after trading north of it at least 80% of the time over the past 20 weeks. According to Schaeffer's Senior Quantitative Analyst Rocky White, there have been five other times this signal has sounded, resulting in an average three-month gain of 13% for PYPL, with 100% of those returns positive.

Reinforcing support at this historically bullish trendline is the fact that it's currently perched right near the century mark. This round-number area is also home to a positive 20% year-to-date return for PayPal stock, and earlier this month helped contain the equity's pullback from its all-time peak. Today, PYPL is up 0.3% at $103.35, on news it has expanded its relationship with Synchrony Financial (SYF) to launch a Venmo credit card.

Short sellers have been ramping up exposure to the payments processor amid its third-quarter retreat, which likely exacerbated pressure on the shares. Short interest on PYPL surged 17.5% in the two most recent reporting periods to 13.99 million shares. Should the shares continue to rebound, a capitulation from some of the weaker bearish hands could create tailwinds.

It should be noted, though, that Paypal is expected to report earnings after the market closes next Wednesday, Oct. 23. PYPL stock has a mixed history of earnings reactions, closing higher the next day in four of the past eight quarters -- including a 9.4% pop at this time last year. On average, the shares have moved 5% the day after earnings, regardless of direction, slightly less than the 6.1% next-day move PYPL's options are pricing in this time around.