Eyes up, profit seekers! Yelp Inc (NYSE:YELP) shares are poised for a rebound. Monday’s candlestick was all the bulls could ask for. What could have resulted in a significant support break for YELP stock morphed into a stern rebuffing of the bears.
If you’ve been waiting for a signal that beaten-down YELP shares were worth a shot, wait no longer.
Since biting the dust on earnings in mid-February, the tech company known for its crowd-sourced reviews about local businesses has been floundering. Year-to-date, shares are down 14%. Compared to the tech-heavy Nasdaq Composite, which is up 8.8%, YELP has been plagued by serial relative weakness.
Its descent has carried shares beneath the 200-day, 50-day and 20-day moving averages. And yet, despite the bearish overtones, buyers are stepping up in defense of the $32 support level, making for an interesting trade setup.
The beauty of trading against a easily identifiable support zone is it provides clean entry and exit signals. If YELP is able to hold Monday’s low ($31.61) then bullish trades are worth a shot. Its next earnings announcement is slated for May 4, so that leaves almost three weeks of time for traders looking to bail before the quarterly ritual.
The YELP Trade
Equity traders could look to buy the stock over Monday’s high ($32.72) with a stop below $31.60. The descending 50-day moving average at $34.50 is a logical first target.
Option traders looking for a higher-probability idea could consider selling the May 29 puts for $1. The initial margin requirement for the trade should be around $600, making the potential return on initial cost 16.66% ($100/$600). If the stock pops enough before earnings allowing you to buy back the puts for 50 cents, do it.
By selling puts, you will be obligated to buy 100 shares of Yelp stock per contract if it sits below $29. If you find wish to avoid such a fate, then simply buy back the puts if they sit in-the-money at expiration.
Editor’s Note: Sam Collins could not write the DTA due to technical issues. He is expected to return Thursday, April 20. As of this writing, Tyler Craig held short puts in YELP.