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Trade of the Day: Momentum in Salesforce.com (CRM)

The bulls’ failure to clear major resistance levels continues to be a problem

The MSCI USA Momentum Factor ETF (MTUM) is an easy-to-follow indicator that gauges momentum in stocks. As you can see from the chart below, the index is once again at major support levels, and a close below $66 would likely be a bearish development. This level held in August, September, January and again on Friday.

momentum

The late-August low touched double-nickels ($55), and that level could come into play on further weakness. More importantly, the 50-day moving average is on the verge of falling below the 200-day moving average. This would confirm a “death cross,” which is usually a bearish setup to lower lows.

As far as specific stocks go, shares of LinkedIn (LNKD) fell a whopping 44% on Friday despite reporting better-than-expected fourth-quarter results. The company topped Wall Street’s estimates by $0.16 after announcing earnings of $0.94 a share on revenue of $862 million. Analysts had penciled in $0.78 a share on revenue of $857 million.

The problem was the 2016 forecast for earnings of $3.05-$3.20 a share on revenue of $3.6-$3.65 billion. The suits-and-ties had estimates for $3.67 a share on revenue of $3.9 billion.

The 52-week and multi-year low for LNKD reached $102.81 on Friday, and there is risk to $95-$90 if $100 fails to hold. Overhead resistance is in the $115-$125 area and could hinder momentum.

momentum

Shares were trading north of $192 going into Thursday’s close. When it comes to trading around earnings, it’s always best to do the math for a move of at least 10% in a stock to see if a call or put option trade is plausible. This would have translated into a $19-$20 move in LNKD shares going into the earnings announcement.

The LNKD February 170 puts (LNKD160219P00170000) were trading for $4.70 ahead of Thursday’s close and zoomed an incredible 1,200% on Friday. I normally shy away from stocks trading over $100 and options that trade over $2 due to the high premiums. Needless to say, however, bearish traders that stepped up to the plate cleaned up.

Given the nearly 50% discount, bullish traders are arguing that shares are way oversold. Obviously, the near-term call options were hammered on the pullback. The LNKD February 210 calls (LNKD160219C00210000) fell over 99% on the lowered outlook after closing Thursday’s session at $6.20. While I would avoid short-term options on LNKD, there could be a longer-term trade in the name if shares hold par.

Another “momentum” stock that took it on the chin Friday was Salesforce.com (CRM). There was no specific news related to the company, but shares fell 13% in sympathy with the earnings results from Tableau Software (DATA), which saw its shares sink nearly 50%.

Much like LinkedIn, Tableau topped expectations but slashed current-quarter earnings and revenue guidance. I don’t actively follow DATA, but I do track CRM. Salesforce.com is scheduled to announce earnings on Feb. 24, and I believe they may have had a better quarter than analysts are forecasting. The current estimates are at $0.19 a share on revenue of just under $1.8 billion.

CRM has topped or matched estimates during the past four quarters, and the “whisper” earnings number is as high as $0.22 a share on sales of $1.81 billion. A bearish target has the company missing estimates by a penny.

With CRM shares at two-year lows, it is a little too early for me personally to establish bullish positions, as the chart shows risk to $55-$50. Fresh resistance is at $60-$62.50.

momentum

We have time to wait and see how momentum looks into the week of the earnings announcement. That said, if a base forms at $57.50-$55 on lower lows, I will be targeting the CRM March 60 calls (CRM160318C00060000) for a possible rebound play. These options will get cheaper on continued weakness in the stock, so speculative traders could build initial positions here, and I will continue to watch them, as they were heavily traded on Friday.

The CRM March 50 puts (CRM160318P00050000) zoomed nearly 400% on Friday after trading to a high of $2.05. These options closed Thursday at $0.38. While these options now seem expensive, they could run further if shares fail to hold Friday’s fresh 52-week low of $57.75.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/salesforce-com-crm/.

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