Are you still trying to determine if we’re in the grips of a bear or bull market? This strategist’s suggestion is to simply listen to the charts and play both sides … or more aptly, the “B-sides” using a pairs play in Spotify (NYSE:SPOT) stock and Pandora (NYSE:P).
Let me explain.
It wasn’t long ago the market sounded like a bear whose grips we’d never recover from if we’re to believe the spin generated by the financial media. In fact, the broad-based S&P 500 sank in excess of 20%. That put the index narrowly into bear territory according to a long-standing and popular tool used by investors.
For their part, Spotify stock was off about 47% from its July all-time-high to late December’s trendy and well-played bear market low. At the same time Pandora stock shed roughly half of SPOT’s bearish trend in establishing a correction of 23% from its September high.
More recently, a surging market off those grizzly sounding corrective lows has found pundits changing their tune and flipping to the other “B-side” or bullish camp while trying to get in sync with a raging and confident rally. Then there’s SPOT stock and P stock.
It shouldn’t be surprising to hear that both streaming music providers have rallied strongly over the past month along with the broader market. SPOT has snapped back by nearly 30%. And shares of P have gained roughly 13% while once again turning in about half the volatility of Spotify stock. But what’s next you ask? I’d say traders should simply focus on who’s grooving with the bears and short SPOT stock. At the same time, appreciate who’s on the top of the charts with bulls and go long Pandora shares as part of a pairs trade that plays both B-sides.
Pairs Stock Strategy: Short Spotify Stock
Blame it on the broader market when you look at SPOT stock’s larger-than-market correction and subsequent burly rally off lows. At the end of the day, that’s the price investors pay, good and bad, when they play in a newer and well-followed growth name like Spotify.
As the world’s largest streaming music provider, the Spotify platform is similar to what Netflix (NASDAQ:NFLX) is for streaming movies and television. Still, while SPOT is well-situated for continued success, even the best of the best, such as NFLX or an Amazon (NASDAQ:AMZN) do have their ups and downs on the price chart. And right now, SPOT stock looks poised to drop.
After hitting fresh all-time-lows in late December, Spotify stock’s aggressive rally is encountering potential resistance within its downtrend. The technical barrier extends from roughly $135.50 to $145. The formidable zone is comprised of the former lows, SPOT’s most recent lower pivot high from early December, as well as the 38% retracement level dating back to the July all-time-high.
The bottom line for Spotify stock? The worst of what’s been a substantial correction may be over in the stock, but it may not be either.
As part of a pairs trade with P stock, today’s technical situation sets up SPOT stock as a short after staging a counter-trend pullback off lows. With shares near $133 and the upper boundary of technical resistance at $145, exposure is limited to just over 9% barring gap risk.
Pairs Stock Strategy: Go Long Pandora Stock
A golden oldie is currently playing in Pandora stock on the price chart. As our other streaming music pairs stock, P’s correction into late December established a healthy looking double bottom pivot low, unlike SPOT stock. And it gets better from there.
The pattern low is part of a bullish “W” corrective base that has formed since Pandora broke out above a four-year long downtrend line during the summer. That’s even more bullish. But that’s not all either. Pandora stock’s base has also successfully tested the former downtrend resistance line for support. This gives the pattern more “street cred” regarding its technical durability.
Now, following the rally off P’s double-bottom, shares have managed to put together a constructive-looking handle near the base’s mid-pivot. Waiting for a breakout above tight zone resistance of $9 to $9.10 would be the logical next step for some technical purists. I get it. But I also wouldn’t play it that way either.
Pandora stock is part of a pairs play and trying to wait for the timing of two positions for perfect entries is futile at best. As such, and in conjunction with shorting Spotify shares, the other B-side or bullish piece of the spread position signaling traders to go long Pandora stock is ready today.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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 options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
