With earnings on tap, now is the perfect time to assess the trends and price levels that matter for Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) stock. BRK.B stock boasts a strong correlation with the financial sector so we’ll begin with a look at the Financial Select Sector SPDR (NYSEARCA:XLF) to see how bank companies have fared during the recent market turmoil.
XLF suffered a nasty break of its 50-day moving average late last month when fears of the coronavirus from China first reared their ugly head. Fortunately, the sector has had no problem recovering alongside the S&P 500, and just touched a new record of $31.27. With XLF now back above all major moving averages, and the market panic subsiding, I see few reasons not to bet with bulls here.
Berkshire Hathaway Stock Charts
The pace of Berkshire’s ascent has slowed in recent years. In fairness to Warren Buffett’s baby, however, the entire financial sector fell into a slumber at the beginning of 2018 and only recently awoke. And since BRK.B carries such a well-established connection with XLF, it’s hard to expect it to power higher when XLF is stuck in the mud.
All of which makes the recent breakout in financials and BRK.B such a welcome development. The weekly time frame shows the two-year consolidation period and 2019’s late-year breakout. Though the upside follow-through has been lackluster, Berkshire Hathaway stock has held above old resistance for a few months. The momentum increase was enough to start pulling the 20-week and 50-week moving averages higher.
A break of last week’s lows near $221 would be concerning, but until then I suggest betting with bulls.
You can see the details of Berkshire’s recent travelings with greater clarity in the daily chart. This week’s recovery lifted it back above the 20-day moving average. I do find last month’s flurry of distribution days concerning, but the selling pressure has eased over the past week. I peg resistance at $231 and support at $223. Despite this week’s rally, BRK.B is technically still stuck in the range that has defined its behavior for the past two months. Until we see a break of either side, it’s challenging to get excited about a directional trade.
Because of the weekly trend and overall bullish sentiment for stocks right now, however, I suspect the eventual resolution will be to the upside.
Implied volatility reveals whether options are cheap or expensive. This, in turn, helps with selecting from the buffet of strategies available. With earnings on the horizon, implied volatility has been pushing higher and now sits at 19% or the 61st percentile of its one-year range. That means premiums are getting pricey, and spreads are more attractive than straight call or put purchases.
Here’s the trade idea.
If Berkshire Hathaway stock runs above $231 resistance, then buy the June $230/$240 bull call spread. The risk is limited to your initial cost and the reward is limited to the spread width ($10) minus the trade cost.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!