Despite wobbly circumstances in the broader economy, Oracle (NYSE: ORCL) has managed to string together an impressive performance. Sure, the overwhelming picture is of ORCL stock losing 22.5% on a year-to-date basis. Yes, it’s ugly, warranting fundamental concerns about the sustainability of artificial intelligence. At the same time, we must also acknowledge the ticker gaining nearly 15% in the trailing month.
Now, the obvious question: is the swing higher in ORCL stock a fluke or can we anticipate further gains?
It’s here that routine financial publications will wax poetic about Oracle’s fundamentals to make their case, either bullish or bearish. While I’m not opposed to the idea of presenting context for ORCL stock, I have a suspicion that doing so is a redundancy. Let’s face it, ORCL is a popular security so you’ve probably already read up on the latest news.
Plus, the more important point is that whatever material public information that has been disclosed has likely been baked into the Oracle stock price. Yes, it might be the case that an independent contractor has found an insight that all the big institutions have missed. But I believe such circumstances are rare.
Next, someone may point to technical analysis to determine where ORCL stock may end up at some point in the future. Basically, the idea is that the past may give clues about what may happen tomorrow. In principle, I agree with this inductive approach. However, technical analysis as it is commonly practiced tends to be undisciplined.
Usually, a practitioner sees some sign or pattern and presumes a probabilistic forward response. But the main problem that I see is that the sign/pattern in question is unconditioned. Just because an analyst sees something in isolation doesn’t necessarily indicate — or even infer — that the target stock will move unusually compared to the random baseline.
ORCL Stock Still ‘Suffers’ From an Order Flow Imbalance
While we may have differences regarding the effectiveness of fundamental and technical analysis, I think we can all agree that equity market behaviors rarely occur in a vacuum (if ever). Advanced research has indicated that markets are reflexive — you can’t determine where Oracle stock may go next with absolute precision because participants respond to shifting circumstances.
It’s like the handicappers at Las Vegas. I’ve said this before but if two evenly matched football teams are scheduled to clash, the odds regarding who may win may be 50/50. But if one of the team’s starting quarterback goes down with an injury prior to kickoff, guess what? Suddenly, the odds may tilt to 65/35 or some other bias beyond 50/50.
No serious sports fan is going to question that dynamic. So, my hypothesis is, why would a serious market participant question an analogous situation for equities?
In some ways, you might say (metaphorically speaking) that ORCL stock has lost its starting QB to injury. In the last 10-week period, Oracle has only managed to print three weekly net positive candlesticks, thereby leading to a downward slope. This 3-7-D quantitative sequence is clearly bearish from an order flow balance perspective: there are simply more negative sessions than positive ones within an arbitrarily defined time period.
Okay, so what do we do with this information? We simply filter for past market data where Oracle stock flashed this exact quant sequence. We then observe what has happened in the next 10-week period following the flashing of this signal. Finally, we gather this data and discover what the median endpoint outcome is for each week of the forecasted period.
If you want to get into the nitty-gritty, you may read this StockEarnings article I wrote last week about ORCL stock. On Aug. 5, I stated that, based on that week’s 2-8-D signal, an intriguing idea is to consider the 145/150 bull call spread expiring Aug. 28. Back then, the share price was $144.39 at close. I can’t guarantee anything but on Monday, Aug. 10, the share price was $151.05.
What’s Next for Oracle Stock?
I’ve been talking extensively about ORCL stock so there’s a risk of overdoing the narrative. In mid-July, I stated that the 135/140 bull call spread expiring Aug. 21 was a good idea, especially because I calculated that the Black-Scholes-assigned probability of profit of 41.8% was likely too pessimistic.
Again, if you look through the technical charts as of the date of this writing (Aug. 10), you can see that I was justified in presenting my alternative probability of profit of 59.4%. I’m not saying that this inductive model is foolproof but under certain circumstances, it may provide a more realistic picture than whatever Wall Street is feeding you.
Given that Oracle stock is currently structured in a 3-7-D sequence, using basic statistics, the median endpoint price at the end of week 6 has been observed to be the equivalent of $160. Assuming that the above model is an accurate representation of future probabilities, there is a mathematical incentive to consider the Sep. 18 155/160 bull call spread.
This idea involves paying a net debit of $230 for the chance to generate a max profit of $270. Again, if the inductive model is accurate, over the theoretical long run, this call spread would likely enjoy positive expected value (EV). It comes down to basic math.
Of the 32 times that the 3-7-D signal has flashed on a rolling basis since January 2019, Oracle stock has risen above the equivalent of the $160 strike a total of 16 times at the end of week 6 (Sep. 18). From this framework, we would anticipate that the ORCL call spread will pay out $135 (0.50 x $270), while losing $115 (0.50 x $230).
If you play this exact same trade multiple times, you would expect a net gain of $20. That’s positive EV for you.
A Caveat Before You Trade
I have to be crystal clear because nuance tends to be lost in the internet. I am not God. I do not know the future. Merely, I am building an inductive case about what might happen tomorrow based on how prior trends fixed to a specific quant sequence have materialized.
But please note this: while the aforementioned signal may imply above-average behavior, this positive result is not logically necessary. My model is not at all presented as a static law of market performance. At any time, the overall sentiment regime can shift, either locally or broadly. If it does, all bets may be off the table.
So yes, I am making a presupposition and it’s up to you to decide whether you accept the premise or not. But also realize this: Wall Street (through Black-Scholes) is also making a presupposition. Therefore, only the trader can decide which presupposition they find more credible.
I presented my case; and now it’s up to you to choose.
