Deep in the core of every runaway bull market lies a cadre of momentum stocks that lead the equity masses to new heights. Like beasts to a watering hole, active traders are drawn to these powerful stocks time and again to revel in the ongoing profit-fest. Among this year’s “momo” leaders are a handful of internet companies including LinkedIn (LNKD) and Pandora (P) to Groupon (GRPN) and Yelp (YELP).
The weakest performer of the bunch is still up a barn-burning 116% year-to-date.
Fortunately, their rocket-like rides into the stratosphere have been punctuated by occasional bouts of profit-taking, causing the formation of retracements and bases that have allowed numerous low-risk entry points for those who didn’t get in at ground level.
Over the past week, LinkedIn stock has developed just such a downturn, which could be providing a dip-buying opportunity for those anticipating a continuation in its uptrend. Let’s delve deeper into LNKD’s price chart to see whether the current pullback is indeed worth buying.
Click to Enlarge For starters, the uninterrupted series of higher pivot highs along with the rising 20- and 50-day moving averages reflect quite the consistent uptrend. The volume patterns also have been compelling, with multiple high-volume up days suggesting institutional accumulation. Better yet, the lack of high-volume down days reveals an absence of any institutional selling.
Finally, the relentless rise in the comparative relative strength indicator shows the ongoing outperformance of LinkedIn stock.
If you’re looking to exploit a continuation in LNKD’s uptrend and want to tilt the odds squarely in your favor, try selling an Oct 230-225 bull put spread for 95 cents. Consider it a bet that LinkedIn stock will remain above $230 by Oct expiration. The max reward is limited to the initial 95 cents received, and the max risk is limited to the distance between strikes minus the net credit, or $4.05.
To reduce the risk, consider exiting the position if LinkedIn stock either falls beneath the short strike price at $230 or if LNKD breaches the 50-day moving average around $226.
Today’s Fed announcement is a bit of an X-factor, so you might consider waiting to see how the market reacts to this afternoon’s release before pulling the trigger on this trade.
At the time of this writing Tyler Craig had no positions in any of the aforementioned securities.