What's in Store for SunPower After Earnings?

During the past 10 days, traders on the International Securities Exchange (ISE) have bought to open 3.75 calls for every put on SPWRA, revealing a distinct preference for bullish bets over their bearish counterparts. In fact, this ratio of calls to puts ranks higher than 82.7% of other such readings, indicating that traders on the ISE have rarely shown a greater bias toward calls over puts.

In the front-month series, traders are dividing their attention between the March 21 and March 24 calls. The former strike, which is right at the money, is home to peak call open interest of 18,693 contracts. The latter strike, which is several points out of the money, boasts a respectable accumulation of 16,014 open calls.

However, it's quite likely that short sellers have been responsible for a healthy portion of SPWRA's recent call activity. Short interest on the shares escalated by 18.7% during the past month, and now accounts for a top-heavy 40.1% of the stock's float. At the equity's average daily trading volume, it would take nearly seven sessions for all of these pessimistic positions to be covered.

With so many bears betting against SPWRA, it's possible that short sellers have been purchasing call options to limit their upside risk in the event of a post-earnings rally. By buying out-of-the-money calls, shorts can avail themselves of "insurance" against an unexpected rally for a relatively low cost.

However, is SPWRA poised for a breakout? With such a lofty stockpile of short interest, a short-squeeze rally is definitely not out of the question, should the company exceed Wall Street's expectations. On the other hand, a number of looming technical resistance levels could throw a wrench in any post-event pop.

For starters, SPWRA is currently pinned beneath pressure from its 20-week moving average. This intermediate-term trendline hasn't been surpassed on a weekly closing basis since mid-October 2009, and it could continue to act as a roadblock.

And, even if the shares can surmount this obstacle, SPWRA's 10-month trendline looms in the $24 region. This long-term moving average has been a thorn in the stock's side since January 2008, so this resistance level is a serious threat to the bullish case. Plus, with options expiration approaching this Friday, the shares could also be stifled by the effects of options-related resistance near the aforementioned March 24 strike.

So, while SPWRA could enjoy a short-lived boost of buying pressure in the event of a stronger-than-forecast earnings report, the stock will likely maintain its laggard status once the initial excitement fades.

Elizabeth Harrow is a senior equities analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the video series Schaeffer's Daily Q&A on SchaeffersResearch.com.