Can STZ Rocket Past Resistance?

In last week's edition of Trading Tools, alternative energy issue First Solar (FSLR - Analyst Report) was analyzed, as it appeared on the Zacks Put/Call Ratio Above 1.0 (bullish) filter. Utilizing the Zacks Unusually High Option Volume screener for today’s column, the sudden surge in call activity surrounding Constellation Brands, Inc. (STZ - Analyst Report) caught my eye.

The Bullish Bandwagon

During the course of Thursday's session, Constellation Brands – which produces and markets a plethora of alcoholic beverages – saw roughly 3,700 calls change hands. The activity was more than five times the security's average daily volume of fewer than 700 contracts, with calls outnumbering puts by more than 43:1.

Digging deeper into the data, the majority of the activity centered on STZ's Nov 17.50 call. The out-of-the-money option saw 3,310 contracts trade on open interest of only 33 contracts, with 56% of the volume changing hands at the ask price, suggesting they were bought. In other words, it appears that a bevy of bulls initiated new back-month positions on STZ.

The optimistic uprising echoes the recent trend on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), where speculators during the past couple of weeks have bought to open nearly 21 times more STZ calls than puts. In fact, the equity's ISE/CBOE 10-day call/put volume ratio of 20.88 ranks in the 90th annual percentile, implying that option traders on these exchanges have scooped up STZ calls at a faster pace only 10% of the time during the past year.

The bullish bandwagon's escalating momentum is further echoed in the stock's Schaeffer's put/call open interest ratio (SOIR), which measures options slated to expire within three months. The equity's SOIR has stair-stepped lower during the past couple of months, and now sits at an annual optimistic acme of 0.21. In other words, short-term option speculators haven't been more bullishly biased toward STZ at any other time during the past 52 weeks.

On the Charts

So, now that we've determined the sentiment in the options pits, let's take a look at STZ's technical backdrop to see if option traders' rose-colored glasses are warranted...

Since flirting with the $11 level in April, the shares of STZ have advanced roughly 39%, to hang out in the $15.30 neighborhood. Nevertheless, the stock is still sitting on a year-to-date deficit of 1.9%, compared to the broader S&P 500 Index's (SPX) gain of 15.5% since the start of 2009. Plus, from a more historical perspective, the equity is fast approaching a potential hurdle on the charts in the form of its 20-month moving average, which has descended into the $16 area. This long-term trendline has contained all but one of STZ's rally attempts since December 2006, and could once again smack the shares lower.

In Conclusion

Considering STZ's impressive rebound from its April lows, it's not surprising that option traders have flocked to the bullpen. However, this excessive optimism could actually handicap the equity in the near term. Should the shares' 20-month moving average continue to play the part of impenetrable resistance - halting the stock's recent run higher - the bulls could abandon ship. An unwinding of optimism in the options pits could exacerbate any potential pullbacks on the charts.

Read the full analyst report on STZ

Read the full analyst report on FSLR