Tech stocks continue to impress with their relative strength, and Microsoft (NASDAQ:MSFT) stock is worth a look.
Today we’re discussing the tech sector’s leadership and building a pair of trades for traders willing to bank on recovery for Mister Softee.
We can see the tech-heavy Nasdaq’s outperformance across a variety of time frames. Take Wednesday, for instance. The equities bloodbath continued with another deathly descent. If you want a silver lining, buyers swarmed at the end of the day to pare the losses.
Since the S&P 500 was down 10% at the lows, narrowing the drop to 5% should be viewed as a modest victory. By comparison, the Nasdaq ended the day down a scant 3%.
But Wednesday wasn’t a one-off. The Nasdaq has fared better than the S&P all along the way with a peak-to-trough drawdown of 25.6% compared to 29.2%.
Tack on the healthier balance sheets of some of the largest companies in the sector, and we can make the case that buying the blood in names like Microsoft and Apple (NASDAQ:AAPL) seems safer than dumpster diving for the likes of airlines, oil, and restaurants.
Microsoft Stock Chart
Some say searching for support during a market meltdown is folly. When fear wipes the masses into a selling frenzy, it seems no amount of demand can stop the onslaught. There’s truth to this. But knowing potential floors can still help identify areas of interest, zones that could finally pull buyers out of the woodwork. We’ll locate these for MSFT.
Bears have smashed and bashed the daily trend of Microsoft just like so many others this month. The 20-day was the first to fail. Then the 50-day gave way. Finally, the 200-day caved bringing us to the current position steeped beneath a heap of overhead resistance.
The volatility has brought disorder and chaos to the price chart. The coronavirus super-sized the candlesticks and has all but degenerate day traders running scared.
Last year, a band of support formed between $130 and $135. We’ve now returned to the scene of the crime, and I’m watching with interest to see if we find enough demand to carve out a much-needed pivot in this area. The last three trading sessions have seen Microsoft stock bottom out at $135. What we need now is some upside followthrough. Indeed, that’s what’s been lacking on all prior rebound attempts in the broader market.
If we fail here, the next potential support area is $123.
Two Options Trades
If you’re willing to bet bulls make a stand, I can think of two smart trades: one conservative, the other aggressive. In both cases, we’re using options spreads. Premiums are too pricey to justify straight call purchases. The aggressive route carries a lower probability of profit, but a bigger potential payday. The conservative path has a higher chance of success, but a smaller payday.
Aggressive: Buy the April $150/$160 bull call spread for around $4.50. Take profits on a run to $160.
Conservative: Sell the April $125/$120 bull put spread for around 75 cents. Take profits when you can repurchase it at 10 cents.
Bid-ask spreads are a joke right now, so limit orders are a must if you’re playing. Furthermore, an overnight gap could change the pricing of these spreads, but the idea is still valid. Buy out-of-the-money call spreads for a more directional bet, or sell out-of-the-money put spreads for less directional one.
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!