I was looking for a 10% premium in shares of enterprise software company Hewlett Packard Enterprise(HPE) - Get Report after its second-quarter earnings. And it did so quickly: the stock made a jump from Tuesday's close of $16.25 to $18.38 on Wednesday morning.
While the company's earnings results weren't spectacular, it didn't matter.
Hewlett Packard Enterprise announced a tax-free merger spinoff with Computer Sciences Corporation (CSC) that both companies believe can unlock faster-growing and higher-margin businesses. The deal should generate stronger free cash flow and synergies, including cost savings of $1 billion in the first year of the deal's closing.
The deal made the stock jump, but it's not time to get greedy. It would be wise to take profits now and wait for a pullback.
The deal will take almost a year to close. In the near term, too many things must go right for HPE stock to maintain its current level. Even when the deal closes, there's execution risk involved in integrating processes and personnel.
From a technical perspective, HPE stock is more likely to pull back than to extend its gains. Take a look at the chart below, courtesy of TradingView.
In one day, Hewlett Packard Enterprise stock has reclaimed both its 20-day and 50-day moving averages at $16.08 (the blue line) and $16.94 (the pink line), respectively. The 10% gap created between Tuesday's close and Wednesday's open is something to keep an eye on. Just as quickly as the stock shot up, it could fall back.
HPE stock must now show confirmation before it becomes a buy. And as you can see from the red arrow above, the shares must first break resistance at around $18.50 or pull back to around $16.75 before it's once again safe to buy.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.