Since bursting onto the public scene a short four months ago, Spotify (NYSE:SPOT) stock has been a well-behaved gift to bulls. The proof is in its price action, which has been healthy with nary a misstep. Dips are being bought and breakouts chased. It’s just the type of stock that belongs on a trend traders watchlist.
And today’s 5% pop provides every reason for tossing out a trade idea.
With four months under its belt, we now have enough price action to analyze adequately. A trend has developed, and pivotal price thresholds have been revealed. Furthermore, we have now seen two earnings announcement to test its nascent uptrend.
The April release delivered a pullback, but nothing more. July’s event saw a one-day breakout followed by a mad dash of profit-taking. But in both cases, the downturns followed the bullish script I like to call the Twin S’s — shallow and short-lived.
The past week of chop has allowed the 50-day moving average to play catch-up. With this oft-watched smoothing mechanism now rising to provide support, today is as good a day as any to deploy new bullish trades. Retreats toward support levels like this provide attractive risk-reward setups. The risk is minimal because traders can exit swiftly if the floor gives way. And the reward is large if the stock can climb back to its prior highs.
Indeed, this morning’s rally is confirming the $175 support area. Look for Spotify stock to revisit $200 in the coming weeks.
Spotify Stock Trade
The liquidity of SPOT options leaves much to be desired. Wide bid-ask spreads demand the use of limit orders and care when entering and exiting. Of course, you could simply buy the stock with a stop beneath $175 support to sidestep the liquidity dilemma altogether.
If you’re intent on playing options, I suggest buying the Oct $190/$200 bull call spread for around $3.60.
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.