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Chip Stock Flashing Historically Bullish Signal Before Earnings

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Semiconductor concern United Microelectronics Corp (NYSE:UMC) is gearing up to release its second-quarter earnings report before the open on Wednesday, July 28. The event could spark a big move for the equity, which has been middling on the charts since May, and was last seen up 0.5% at $9.48. On top of this, the stock just pulled back to a historically bullish trendline, which could launch it higher heading into August.

Specifically, UMC just came within one standard deviation of its 160-day moving average after a lengthy period above the trendline. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, four similar signals have occurred during the past three years. One month after each of these signals the stock was higher, averaging an impressive 23.4% return in that time period. From its current perch, a comparable move would put UMC just south of the $12 level, which the stock hasn't touched since 2001.

umc chart july 26
umc chart july 26

A look back at UMC's past eight earnings reports shows a mixed history of next-day responses, though its past three reports have been negative, including a 7% drop this January. During the past two years, UMC has averaged a post-earnings swing of 2.7%, regardless of direction, which is much smaller than the 8% move options players are pricing in this time around.

Speaking of options, sentiment has been extremely bullish over the past two weeks, with 36.39 calls picked up for every put at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio stands higher than 65% of readings from the past year, suggesting a heavier-than-usual appetite for long calls of late.

These options can be had at a bargain right now, too. The security's Schaeffer's Volatility Index (SVI) of 51% sits above just 6% of readings from the past 12 months. This implies options traders are pricing in low volatility expectations for UMC at the moment.