Investors awoke to a sea of losses this morning, but many stocks quickly turned from red to green. Small-caps and tech are leading the turnabout which gives us ample reason to focus on some tech plays. Chief among the stalwarts today is Square Inc (NYSE:SQ). At the time of this writing, SQ stock is up an impressive 3.40%, scoring a breakout in the process.
Let’s break down its chart and build a trade for capitalizing on further strength.
Ever since busting out of its post-IPO trading range, Square stock has been a model citizen. Its uptrend has persisted with uncanny accuracy. The series of higher highs and higher lows in the weekly chart is thus far uninterrupted. The 20-week moving average has proved a formidable foe for bears.
We haven’t seen a single retracement succeed in falling below this oft-watched smoothing mechanism. Today’s jump places SQ a stone’s throw from record territory.
Turning to the daily chart reveals greater detail of the ongoing ascent. The price action over the past quarter has formed a classic cup-and-handle pattern. All in, the formation has allowed SQ stock to digest gains and build a base to launch from for its next ascent.
The past two-and-a-half weeks of chop are what created the handle. The sideways movement allowed the 20-day moving average to play catch-up, digesting overbought pressures in the process.
I consider today’s breakout a completion of the handle and thus a signal that the next upswing has begun.
SQ Bull Call Spreads
The bull call spread offers a low cost and limited risk avenue for exploiting further strength. Buy the July $55/$60 call spread for around $2.35. Consider it a bet that the stock will rally above $60 by July expiration. If it does, you will capture the max reward of $2.65.
The initial cost of $2.35 represents the max risk and will be forfeited if Square sits below $55 at expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
