The S&P 500 managed to shine a bit on Friday in an otherwise troubling week below the 50-day simple moving average that also included some action below the 200-day SMA during the week.
But if you’re of the mind the worst is over and looking for a bullish position, look no further than Sunedison (SUNE) and a bull vertical strategy.
Sunedison, a major and diverse player in the solar space and alternative energy, has seen its shares acting every bit the part of new leadership for a market probably in need of some fuel outside of the technically aged areas like biotech and healthcare.
It should be mentioned a corrective move of 4.5% in the S&P 500 from the May high to last week’s low is technically within the 3% to 10% shakeouts historically provided by Mr. Market before it moves higher. Based on that, one might think SUNE stock is indeed in good position.
But with many market observers calling for a larger, 10%-plus correction in the S&P 500 — given that it has been about four years since such an occurrence, so historically speaking, it’s long overdue — is SUNE stock worth the risk?
Sunedison: Charts & Analysis
Click to Enlarge Looking to the weekly chart of SUNE stock, the picture looks very attractive thanks to both recent relative strength and a strong base count.
Regarding SUNE’s relative strength, shares are back above the 50-day SMA following several sessions of challenging the trendline for support, and they actually forged a seven-day high by Friday’s close.
SUNE is currently forming a first or second weekly base after putting together a “base reset” courtesy of a correction that took out the lows of an extended, late-stage, fifth weekly base that can be counted from the lows of 2012 (not shown).
Counting bases is important. Stocks that have established a series of uninterrupted bases without correcting are more prone to the physics of a looming correction. A fourth or fifth base that develops — such as the one addressed in SUNE stock — fits that description.
To play devil’s advocate, Sunedison’s relative strength in the solar group could always prove to be the last chip to fall, rather than bulletproof technical leadership. There’s also a possible head-and-shoulders top on the daily chart, if you wanted to look at the charts as a pessimist.
That all said, I like the idea of entering SUNE long, but not until we get about 3% higher than we are now (so, roughly $31.40). That price level would narrowly break the high of the left shoulder. Further, we’d anticipate that type of strength would only be possible if the market is able to follow through to the upside with conviction.
Bullish Option Strategy for SUNE Stock
Click to Enlarge Buy an Aug $32/$35 call spread for $1 to $1.10. (Note: With shares of Sunedison at around $30.40, the spread currently is priced for 79 cents.) The above pricing is an estimate based on liquidity and the bull vertical’s value change due to delta and gamma over a one-point increase to $31.41 in SUNE stock.
If we were to look at the volatility chart above, traders might think levels are attractive for an outright long call — and I wouldn’t fault that if we were focused on option premiums and underlying volatility in SUNE stock. But as discussed, there are other important factors at play.
Additionally, Sunedison earnings are expected to be announced sometime in the first half of August, prior to this bull call spread’s expiration, and an earnings announcement can work both ways when it comes to options position.
But for $1 to $1.10 in initial risk, you can receive up to $1.90 to $2 in profit above $35. That makes a SUNE bull call spread an ideal position.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.