Late in October, three momentum stocks fell into their support zones and flashed an opportunity to go long. And now it is time to revisit them since so much has happened in Disney (NYSE:DIS), Netflix (NASDAQ:NFLX) and Twitter (NYSE:TWTR) since then. These are all good stocks to trade, especially into the volatility of a year-end season.
First we have to differentiate between trading and investing. For example, an investor can sell NFLX stock at one point or another while being bullish on the overall prospects of the company. So don’t mistake any negative notes here as a formal stance against a stock. These are merely attempts at trading the stock price ranges for DIS, NFLX and TWTR.
Overall it is worth noting that the stock markets are still in an uptrend and near all-time highs. This is in spite of a red start to December in the first two trading days of the month. This dip doesn’t yet change the fact that equity buyers are still in control of the price action. So, the trading bots will buy the dips until there is a change in circumstance.
The Federal Reserve is still offering up easy money policies. It seems that they are committed to keeping rates low, even if inflation heats up a bit. Broad economic reports are deteriorating, but for now, Wall Street feels comfortable with the safety net below. With all that in mind, let’s take a look at three important momentum stocks.
Momentum Stocks to Trade: Disney (DIS)
Of the three today, Disney stock is the champion this year. It’s up almost 35% year-to-date and it did so in fantastic fashion. More importantly, it rallied 18% off the October opportunity. I wrote about it then and it definitely delivered on its promise. Exuberance over the company’s streaming platform has wowed investors.
This reaction was almost a sure thing — I mean, who isn’t familiar with the famous Mickey Mouse? Every parent on the planet will need a subscription because their kids will demand it.
The signup metrics have been on fire. The trick is to see how much of the top line will flow to profits. There is no doubt a lot of noise buried in the headline numbers. But nevertheless, the streaming platform will change the game for DIS stock so it will be a tough short to sustain.
From a trading perspective, this means that Wall Street will buy the dips. One problem technically is that DIS and the indices in general are in a steep wedge. Those are susceptible to sharp dips. So, timing entries from a trade perspective is critical. Those who own DIS stock for the long haul can stay in it through this noise. But up here it’s not an obvious point of entry.
I am optimistic about the prospects of the stock markets so DIS should also rally into 2020. However, I would rather wait to either a chase a new breakout or wait for Disney stock to retest the $144 zone. So in essence, I either want to buy it high and sell it higher, or reset another 10% swing off a bounce on support.
Netflix (NFLX)
Source: Charts by TradingView
This week Netflix stock is getting tested hard as investors quickly shed frothy stocks. But the good news is that it is trying to hold short-term support near $302 per share. This dip doesn’t change much for NFLX trading patterns yet. It too rallied 20% off the October opportunity so the bulls have some room to give back.
When a stock falls inside an uptrend, it usually is an opportunity to reload long. In this case, NFLX stock has short-term support down to $290 per share. In addition, round numbers like $300 often make the area more contentious and that also provides support. So if you’re long the stock, it is not time to panic yet.
On the other hand, an upswing opportunity is right around the corner. It just needs one of two things to happen first. Netflix stock could break out above $318 per share, targeting the gap to fill $370. For those waiting on this option, it is important to note the major resistance at $335. A second option is to snipe an entry closer to $290 a share. In either case, there would then be a short-term trade.
Until then, patience is the best course of action.
Twitter (TWTR)
Source: Charts by TradingView
Unlike the other two momentum stocks on this list, TWTR stock is just not as impressive. The price action teetered both above and below the October opportunity levels. Luckily, the trade is still even so there is no reason to change the setup. Twitter is still inside a support zone as it is waiting out the effects of the bad earnings report that management just delivered. I don’t believe there will be a big rally until the company gives Wall Street reason to take the brakes off it.
So it is also not surprising that Twitter stock is lagging, barely up for the year. It has had many potential bullish setups that failed. Now, the onus is on the bulls to prove that they can remount some upward momentum. Conversely, the onus is also on the bears to take TWTR to new lows. Last December’s low zone is strong secondary support.
But that doesn’t mean that TWTR stock is not a good trading vehicle. It has support so it is a candidate for selling downside risk into the options markets to create income out of thin air. This way, traders wouldn’t even need a rally to profit as long as support holds. For example, I can sell the January TWTR $28 put or put spread and all I would need to profit is for TWTR to stay above my level. So in essence the trade is long Twitter stock but with a 7% buffer from the current price. Compare that with buying the share and risking $30 now with absolutely no room for error.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
