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Blue Chip Bubbles Up to Bearish Trendline Before Quarterly Report

Emma Duncan

Blue chip UnitedHealth Group Inc (NYSE:UNH) is 0.4% higher on the charts this afternoon, with traders cautiously optimistic ahead of earnings. The healthcare name is slated to report third-quarter earnings before the open tomorrow, Oct. 15. Let's take a closer look at what the options market may be expecting for the equity's post-earnings moves, as well as how UNH could be flashing a short-term warning signal.

UnitedHealth stock has struggled on the charts over the past few months. The shares have been stuck in a downward spiral since peaking above $265 in July, but recently found support in the $215 area -- home to their April lows. Amid the October rebound, though, UNH recently ran into its descending 40-day moving average.

Daily UNH with 40MA

Per Schaeffer's Senior Quantitative Analyst Rocky White, the security is trading within one standard deviation of its 40-day moving average, after spending significant time below this trendline over the past two months. Similar tests of 40-day resistance have occurred five times in the past three years, resulting in an average five-day loss of 3.07%, with 80% of the returns negative. With the stock now trading at $222.46, a similar drop would put UNH back near $215 soon.

Despite its long-term negative price action, short-term options traders have preferred calls. In particular, the Schaeffer's put/call open interest ratio (SOIR) of 0.73 ranks in the 16th annual percentile, showing that it's rare for near-term call open interest to outweigh put open interest by such a wide margin. The aforementioned 215 strike is home to both peak call and put open interest in the October series of options, which expire at the close this Friday, Oct. 18.

Echoing this, UNH is now sporting a 50-day call/put volume ratio of 2.56 at International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio ranks just 2 percentage points from an annual high, indicating a heavy preference for long calls over puts during the past 10 weeks of trading.

Looking at the security's earnings history, UnitedHealth stock has closed lower the day after reporting in three of the past five quarters, including the last two in a row. Over the past eight quarters, the equity has served up an average post-earnings swing of 3.5%, regardless of direction. However, this time around, the options market is anticipating a larger-than-usual 5.7% move.