Investors seeking a quick upside opportunity may want to consider adding Thermo Fisher Scientific (TMO) on their radar. Thanks to a combination of value compression, positive options flow and a compelling quantitative signal, TMO stock could be a solid reversal candidate.

A scientific instrument manufacturer, Thermo Fisher is somewhat of a contradiction. Thanks to its leadership in the scientific realm, the company is incredibly relevant. It’s no surprise that Wall Street analysts rate TMO stock as a Strong Buy with an average price target of $560.62. On the flipside, technical indicators suggest that TMO is a name to avoid. Over the past 52 weeks, the equity slipped more than 29%.

In fact, TMO stock is one of the biggest losers in terms of one-year equity performance. Nevertheless, this value compression could offer an opportunity for contrarian investors. After all, we’re talking about an enterprise that is practically involved in every segment of the healthcare industry. At some point, the discount will become too attractive to ignore.

This milestone may have already been reached. Recently, options flow data — which focuses exclusively on big block transactions — showed that net trade sentiment on Wednesday hit $24.887 million, favoring the bulls. Most of the transactions involved sold puts at various strike prices for the June 20 expiration date.

Curiously, gamma exposure for the aforementioned options chain reveals that gamma — or the measure of how fast delta changes in an options contract — is negative for strike prices up to around $410. From $415 onward, gamma becomes decisively positive.

Essentially, bullish traders may experience resistance under $415. Should TMO stock rise above this level, resistance should lessen due to the strong possibility that market makers are net short calls in that price region. This means they may buy stock to hedge as TMO moves higher — which could be a legitimate proposition.

Market Breadth Signals Potential Upside for TMO Stock

While assessing narratives and even derivative market activities can help provide context for a particular enterprise or asset, they’re not always the best predictors of market behavior. Bottom line, the traditional methodologies of fundamental and technical analysis fall prey to the non-stationarity problem. That’s an academic way of saying that the underlying metrics that characterize the target investment often fluctuates dramatically across time and sentiment regimes.

For example, back a decade ago, TMO stock exchanged hands for around $130. Right now, it’s over $400. Therefore, conducting statistical clustering or related analyses on prices around the $400 range will suffer from a lack of data; simply stated, TMO being priced at $400 is a relatively recent phenomenon.

On the flipside, market breadth — or the pattern of accumulation and distribution — is a binary, discrete event. At the core, market breadth is essentially demand and demand is either happening or it’s not. Further, demand structures that materialized in 2015 are still relevant if they also materialize today.

This is the central reason why I have recently focused on market breadth over any other analytical methodology. By compressing price action into binary sequences — the mathematical concept is abstraction — we can impose stationarity across the entire time spectrum of a publicly traded security.

And what does abstraction accomplish? The ability to categorize and quantify market behavior, which is an essential step in determining the probability of how one demand structure transitions to another.

Switching back to TMO stock, in the past two months, the security printed a “3-7-D” sequence: three up weeks, seven down weeks, with a net negative trajectory across the 10-week period. To the uninitiated, this bearish-dominated pattern implies continued weakness. Empirically, though, the sequence typically signals a sentiment reversal.

In 65.71% of cases, the following week’s price action results in upside, with a median return of 3.33%. Last Friday, TMO stock closed at $402.72. If the implications of the 3-7-D pan out as projected, TMO could potentially rise to $416 in short order.

Aggressive Trades for the Bullish Speculator

Those who have faith in the above probability matrix may consider the 410/415 bull call spread expiring June 20. This transaction involves buying the $410 call and simultaneously selling the $415 call, for a net debit paid of $280. Should TMO stock rise through the short strike price at expiration, the maximum reward is $220, a payout of almost 79%.

Primarily, what makes this trade attractive is the underlying sentiment shift. As a baseline, a long position in TMO stock on any given week has a 54.04% chance of being profitable. However, the response to the 3-7-D sequence suggests that bullish speculators will enjoy more than 10 percentage points of free odds in their favor. Therefore, a debit-based strategy makes statistical sense.

Traders who want to get really aggressive may consider the 415/420 bull spread expiring June 20. Thanks to the gamma exposure, if TMO stock rises above the $415 threshold, market makers who find themselves on the opposite side of the trade may begin hedging, which could drive shares even higher.

It’s a risky move but if it pans out, the payout is over 117%.