Callaway Golf Fails at Annual Risky Level on Earnings Beat

Callaway Golf Company (ELY) reported better-than-expected earnings per share on Aug. 6. The stock popped to $20.31 but closed the day below its annual risky level at $19.95. The American and global sporting goods company makes golf equipment that is sold in more than 70 countries around the world. The California company is the world's largest maker of golf clubs.

Callaway stock closed Wednesday, Aug. 19, at $18.80, down 11.3% year to date and in correction territory at 15.8% below its Jan. 16, 2020, high of $22.33. The stock is also in bull market territory at 295.8% above its March 18 low of $4.75. The company has an elevated P/E ratio of 39.17 and a puny dividend yield of 0.21%, according to Macrotrends.

The daily chart for Callaway Golf

The daily chart for Callaway is consolidating a bear market decline of 78.7% from its Jan. 16 high of $22.33 to its March 18 low of $4.75. The stock failed to hold its 50-day simple moving average on Feb. 6. The 200-day simple moving average then failed to hold on Feb. 21.

While this decline began, the stock's annual pivot at $19.95 failed to hold on Feb. 11. This accelerated weakness to its March 18 low of $4.75. On the V-shaped recovery, shares of Callaway returned to the 50-day simple moving average on April 27.

The 200-day simple moving average was then tested on June 5. The 200-day simple moving average was a magnet between June 5 and July 16. This led to the rally to the post-earnings high of $20.31, which was the test of the annual risky level at $19.95.

The stock is above a golden cross, with the 50-day and 200-day simple moving averages at $17.76 and $17.03. The golden cross was confirmed on Aug. 5, when the 50-day simple moving average crossed above the 200-day simple moving average.

The weekly chart for Callaway Golf

The weekly chart for Callaway Golf is neutral, with the stock above its five-week modified moving average of $17.72. It's also above its 200-week simple moving average, or reversion to the mean, at $16.18.

The 12 x 3 x 3 weekly slow stochastic reading is projected to decline to 77.59 this week, down from 82.79 on Aug. 14. Declining below the 80.00 threshold is a warning, as the 12-week slow stochastic readings scale between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

Trading strategy: Buy Callaway Golf stock on weakness to its quarterly and monthly value levels at $16.26 and $13.68. Reduce holdings on strength to its annual and semiannual risky levels at $19.95 and $22.08.  

How to use my value levels and risky levels: The stock's closing price on Dec. 31, 2019, was an input to my proprietary analytics. Semiannual and annual levels remain on the charts. Each level uses the last nine closes in these time horizons.

The third quarter 2020 level was established based upon the June 30 close, and the monthly level for August was established based upon the July 31 close. New weekly levels are calculated after the end of each week, while new quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year, and annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in. To capture share price volatility, investors should buy shares on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before their time horizon expires.

How to use 12 x 3 x 3 weekly slow stochastic readings: My choice of using 12 x 3 x 3 weekly slow stochastic readings was based upon backtesting many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows, and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading, and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00, with readings above 80.00 considered overbought and readings below 20.00 considered oversold. A reading above 90.00 is considered an "inflating parabolic bubble" formation, which is typically followed by a decline of 10% to 20% over the next three to five months. A reading below 10.00 is considered "too cheap to ignore," which is typically followed by a gain of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.