A truly off-the-mark and disappointing read on nonfarm payrolls following Thursday’s bullish but always volatile ADP payrolls teaser has delivered a small wake up call to market bulls jettisoning ever higher for the past several sessions.
Of course it doesn’t hurt (Friday’s reaction) that an extended Naz’ 100 (QQQ) established a double top, the SP-500 (SPY) busted a right shoulder but failed to clear its former head or that the VIX ($VIX) recently signaled overly complacent sentiment and has remained at historically cheap nominal levels exuding a wee bit too confident bravado.
So, where’s the next zig or “ZAGG” for the market? Given the fore-mentioned circumstances at hand, a minimum move and test of 50SMA support in both the QQQ and SPY seems a reasonable target to cure the bull of late of some of its excessive behavior.
One potential volatile up-and-comer that's already encountered some of that necessary zagg-like unwinding of overconfidence while maintaining both fervent believers and equally staunch naysayers is Zagg Inc (ZAGG). The highly-ranked small cap (per IBD) outfit manufactures mobile device skins under its invisibleSHIELD, ZAGGaudio and ZAGGskins labels.
Bulls and a legion of bears (48.5% short interest) are up in arms over the company’s prospects as its accessory gear becomes ever popular with the “i-Consumer” (AAPL) population, but whose niche products ultimately have low barriers to entry and whose higher-ups in the company, have had a somewhat shady past. I’ve included the link to a recent Seeking Alpha article, which along with the feedback / comments section, allow readers to get a feel for the very strong battle being waged for and against Zagg and its shares.
Figure 1: Zagg Inc (ZAGG) Daily Chart
click to enlarge
Technically speaking, the price zigs of late have proven bountiful for bears. That same action however has also set up ZAGG for a potential counter-trend Wave 4 low. The ever-volatile stock maintains historical or statistical volatility nearing 90% longer-term, a similar reading for its 20SV and a range of 65% - 79% for its shorter term zigs and ZAGGs.
Thursday established a wide and volatile daily doji candle whose lows hit the Wave 4 projected support zone. In doing so however, the price action has come early relative to Elliott’s own time objective while ProfitSource’s standard oscillator has weakened but not yet tested the zero line.
Another testament to ZAGG’s muscular and volatile ways is its options. Investors have smartly come to use the company's listed calls and puts as part of their daily trading regiment. Daily contract volume is around 3,000 total and rising and in recent sessions has seen record spikes in excess of 40,000.
In addition, ZAGG features one point strike distances and does provide relatively tight spreads in its front month and slightly weaker but still overall decent liquidity provision in its August contract for outrights and verticals and possibly combos of the two.
One caveat in its option pricing and regardless of which camp comes out on top in the days ahead is due to the ultra high short interest in shares, implied volatility is skewed aggressively. ZAGG’s puts trade high relative to the calls because of hedging limitations of holding or attempting to short stock. As much, traders should consider the impact of any strategies such as a long call calendar which could see its profitability impacted adversely due to the difficulties surrounding assignment of a hard-to-borrow stock.