Employment services firm Paychex, Inc. (PAYX) is a leading payroll processing, human resources, and benefits outsourcing provider for companies of all sizes. The stock has been benefiting from the strong economy but now has an overbought weekly chart after setting an all-time intraday high of $88.43 on June 11. Paychex shares closed Friday, June 21, at $86.52, up 25.2% year to date and in bull market territory at 41.1% above the Dec. 26 low of $61.32.
Analysts expect the company to post earnings per share of 66 cents when it reports results before the opening bell on Wednesday, June 26. The stock is not cheap, as its P/E ratio is an elevated at 30.68 with a dividend yield of 2.87%, according to Macrotrends.
Earnings are expected to benefit from client strength and interest on funds that the company holds. Thus, both earnings and revenue are expected to show solid gains. Some say that the company's acquisition of Oasis Outsourcing in December should have a positive impact on earnings.
The daily chart for Paychex
Paychex began its bull run on Dec. 26, when it traded as low as $61.32. This day was a "key reversal," as its close of $64.32 was above the Dec. 24 high of $63.70. A "key reversal" indicates that a tradeable rally will follow.
The close of $65.15 on Dec. 31 was an important input to my proprietary analytics, and still in play is the annual pivot at $72.44. Once this level was penetrated and held on Feb. 5, upward momentum picked up. This was confirmed by a "golden cross" that formed on Feb. 27, when the 50-day simple moving average rose above the 200-day simple moving average to indicate that higher prices would follow. This tracked the stock to its all-time intraday at $88.43 set on June 11. The stock is well above its 50-day and 200-day simple moving averages at $84.97 and $74.99, respectively.
The weekly chart for Paychex
The weekly chart for Paychex is positive but overbought, with the stock above its five-week modified moving average of $85.30 and above its 200-week simple moving average, or "reversion to the mean," at $62.47. The 12 x 3 x 3 weekly slow stochastic reading ended last week at 88.14, sliding from 89.79 on June 14 after being above 90.00 at the high as an "inflating parabolic bubble."
Trading strategy: Buy Paychex stock on weakness to the 200-day simple moving and to its annual value level at $74.99 and $72.44, respectively, and reduce holdings because of the "inflating parabolic bubble."
How to use my value levels and risky levels: Value levels and risky levels are based upon the last nine weekly, monthly, quarterly, semiannual, and annual closes. The first set of levels was based upon the closes on Dec. 31. The original semiannual and annual levels remain in play. The weekly level changes each week; the monthly level changed at the end of each month. The quarterly level was changed at the end of March.
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.
The close on June 28 will be the second most important for 2019 in terms of my analysis. This close is an input to my proprietary analytics and will generate new weekly, monthly, quarterly, and semiannual levels.
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. Recently, I noted that stocks tend to peak and decline 10% to 20% and more shortly after a reading rises above 90.00, so I call that an "inflating parabolic bubble," as a bubble always pops. I also refer to a reading below 10.00 as "too cheap to ignore."
Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.