The shares of burger joint Shake Shack (SHAK) have undergone a steep pullback during the second half of 2018. In fact, the stock is down about 33% from its July peak north of $70--meaning SHAK has been in its own personal bear market for a while, says Elizabeth Harrow.

However, the equity’s pullback to the site of compelling technical support, coupled with the heavy pessimism already priced into SHAK at current levels, suggests that now could be an opportune time to bet on a rebound.

SHAK appeared on our radar this week when Schaeffer’s Senior Quantitative Analyst Rocky White pointed out that the stock had pulled back to within one standard deviation of its 80-week moving average, after having spent 60 consecutive weeks above this trendline. There have been just two previous such signals since SHAK's 80-week moving average first appeared in mid-2016 -- an admittedly small sample size, but the results going forward after those prior two pullbacks have been unanimously bullish.

Specifically, four weeks after SHAK’s last two 80-week pullbacks, the stock was higher on both occasions, with the average return arriving at 8.38%. And looking out three months after those signals, the returns were again 100% positive, with an average return of 58.19%.

Currently, the 80-week moving average for SHAK is located around $46.50 -- just about 1 point above the level corresponding with a 61.8% Fibonacci retracement of the stock's rally from its September 2017 low to its July 2018 high.

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If SHAK can once again successfully leverage this long-term trendline support into a sharp bounce higher, it could spark a massive unwinding of bearish sentiment. For starters, the majority of analysts recommend avoiding the stock, with only four Buy ratings out of 11 brokerage ratings. This leaves plenty of room for future upgrades.

Traders appear even gloomier about SHAK's prospects. Despite an 8.4% drop in the most recent reporting period, short interest still accounts for 20.2% of the equity's float, or 6.4 times Shake Shack's average daily trading volume. That's plenty of potential fuel for a short-covering rally down the road.

Likewise, speculative players have loaded up on put options. During the past 10 trading days, options buyers on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have picked up 3.95 puts for every call on SHAK. This ratio registers in the 96th percentile of its annual range, as traders have rarely shown a stronger bias toward bearish bets over bullish.

Traders looking to bet on SHAK's latest 80-week Buy signal may want to consider the stock’s March 42.50 call, which was last asked at $7.00. This option will double in value on a rally by SHAK up to $56.50, about 20.5% above current levels.

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Recorded: TradersExpo Las Vegas, Nov. 13, 2018.
Duration: 49:23.