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IP Stock's Earnings Pop Could Reverse Quickly

Patrick Martin

International Paper Co (NYSE:IP) is enjoying a breakout day, up 3.6% to trade at $45.71 today after the paper company reported a second-quarter earnings and revenue beat. However, there should some caution surrounding the stock, as it just pulled up to a trendline that has historically bearish implications.

More specifically, the equity has run up to resistance at its 200-day moving average, after a lengthy stretch below it -- defined for this study as nine months. There have been four similar encounters to this moving average in the last three years, after which IP stock was lower a month later by 9.3%, on average, per data from Schaeffer's Senior Quantitative Analyst Rocky White, with 100% of the returns negative.

Daily Stock Chart IP

If the implied volatilities hold steady over the next couple of weeks, White's modeling shows that an at-the-money IP put option could potentially return 146% on another expected rejection from resistance at the 200-day trendline. In other words, prospective put buyers could more than double their money on a roughly 9% drop in the shares.

From its current perch, another "average" pullback from this trendline over the next month would put the stock just north of $40, the site of its 2019 lows. Prior to today's breakout, IP had spent most of 2019 carving out a channel of lower highs, and has shed 13% year-over-year. 

There's ample room aboard the bearish bandwagon should the security pivot lower. Short interest fell by 1.3% in the most recent reporting period to 10.51 million shares. This takes up a slim 3.6% of IP's total available float, and only 3.4 times the average daily trading volume.