The market paused its three-day rally on Friday. At this point it seems likely that traders have priced in the short-term value of the stimulus bill and have returned to a more neutral stance towards the major indexes.
Futures are trading higher at the time of this writing, but the major indexes aren’t up by much.
Seeing some moderate (in relative terms) profit-taking on Friday before the weekend wasn’t surprising. Traders were rebalancing a little in favor of Treasury bonds, but we didn’t see the same rush into gold or the U.S. dollar, which could be a sign that panic is beginning to ebb.
With stocks taking a break, we think now would be a good time to sell covered calls against a consumer staples stock we’ve been holding: Ball Corporation (NYSE:BLL).
We think BLL is uniquely positioned to take advantage of consumer spending in the short term, and if there is recovery this summer, BLL would benefit.
Why Sell a Call if the Rally is Paused?
We usually want to sell calls when a stock has rallied and seems unlikely to break resistance in the short term. That way we are lowering the risk of being called out at an unfavorable price and increasing the chance that we can compound our income by rolling the short calls out again if the stock flattens or declines.
So, if BLL has stopped rising, why sell a call against it?
BLL has seen intraday swings of 10% or more during this health crisis, and we thought it was best to wait for the stock to settle before entering a new trade on it.
We originally bought shares of BLL for $77.50 each, and we don’t want to sell a covered call if we’re going to risk being called out of the stock.
Fortunately, new resistance has emerged.
Old Support Becomes New Resistance
The $70 range is a former support level that broke during the panic, and we would expect to see traders treat that level as resistance while the stock is rising. We think the potential for the stock to break $70 before mid-April is very low, so it would make an excellent strike price.
Daily Chart of Ball Corporation (BLL) — Chart Source: TradingView
BLL provides metal packaging for food products, and canned goods are very important to Americans right now. That connection should keep BLL afloat in the short term. And once stocks are rising again, BLL’s solid dividend will be attractive in this zero percent interest rate environment.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
