What's the business?
Nuance is an American multinational computer software technology corporation, headquartered in Burlington, Massachusetts, on the outskirts of Boston, that provides speech recognition, and artificial intelligence.
What's going on?
On November 18th $NUAN released its Q4 results, stating that it delivered Revenue and Earnings Per Share (EPS) at the high end of guidance range. They are seeing continued strength in Dragon Medical One and emerging cloud-based Healthcare offerings, and are looking to penetrate this market further.
Their CEO, Mark Benjamin stated the following:
We continue to execute on our strategic initiatives, accelerating our cloud transition in Healthcare and focusing on our AI-first approach in Enterprise.
What does this mean?
The market reacted favourably and $NUAN gapped up 10.6% with a Power Earnings Gap. Besides the gap-up, we saw the other traits of a Power Earnings Gap that we like to see:
- Saw a major increase in volume compared to other days
- Retained most of its gains throughout the day
- Closed the day strongly as major players got in
It is then no surprise that various analysts like Morgan Stanley and Guggenheim upgraded their recommendations, and raised their profit targets to a range of $41 to $45.
Unlike many other Power Earnings Gaps, we did not seek profit taking occur. If anything, the stock continued to rally and it was difficult to pin-point an attractive entry point, as it was significantly extended and could pull back. In such instances, we prefer not to chase as we seek high probability setups.
As it transpired, that pull-back did not occur and $NUAN fell in a consolidation pattern called an ascending triangle, where it met resistance around $44.00, but continued to post higher lows on its daily bars. This is a bullish setup, as typically the more often a resistance zone is tested, the more likely it is to break.
Since then it has been trading in a fairly narrow range of $41 to $44, with relatively low volume. This is often the case, as after a gap up the market needs time to digest the new information. Whilst it has been range-bound, it has built up a good volume profile, whereby a large number of people have built in the $40-$44 range. This volume profile typically acts as a launch-pad for the next leg up.
Indeed, it attempted a break out late last week but ultimately failed to hold above $44. Again, this is not uncommon, as the first break out is often a false one. What is more important, when it dropped below $44 it continue to post higher lows on Friday's candle, which indicates to us that $NUAN will attempt another breakout imminently.
Why should I care?
For your trade: a strong break-out candidate
$NUAN ticks all the right boxes for a breakout after a Power Earnings Gap. However, we should note that the Stochastic has not curled upwards yet, as it trended downwards briefly given its false breakout. We feel this will change in the coming week, provided that the broader market holds.
We set out profit target at $47.50, which is below the highest analyst price target of $45. They are often conservative in nature, and with a good volume profile and a decent short float of 8.1%, we believe that a Fibonnaci 1.618 target of around $47.50 is feasible.
Therefore, we recommend the following criteria to help you manage your trade:
|Entry:||$ 44.00 - $44.50|
|Initial Profit Target:||$47.50|
For your risk: an attractive risk / reward ratio
$NUAN exhibits relative strength compared to the broader market and has an attractive setup, with no near-time earnings date which may add additional risk. We thus feel fairly confident about the risk / reward for this trade.
|Likelihood:||7 / 10|
|Risk / Reward Ratio:||2.3|
|Earnings Date:||3rd February 2021|
Please be aware that if your holding period extends over a future earnings date, the volatility of the stock rises and thus its risk profile inherently increases.
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