On the heels of two straight days of harder selling and one much larger rally, what should investors anticipate going forward? In today’s “new normal,” I believe it’s simply business as usual — find stocks to buy and stocks worth shorting. We’ll see that with this gallery’s three movers and shakers.
Just as some may have thought Wall Street was once more a one-way street and risk-assets knowing only one direction, a drilling in oil the past two sessions has challenged the market’s Federal-Reserve-backed and “follow-thru-day” approved rally recently. As of Tuesday’s close, market averages had slumped on either side of 5% and chipped modestly away at gains of more than 30% since bottoming on March 23.
The aggregate price action begs the question, are we looking at a pullback to be purchased and an opportunity for stocks to buy? Or arguably, are investors staring at a top where stocks to sell short are more approachable?
In our estimation the current environment is inviting investors to trade the market long, but also pick selectively from the short side. But don’t just take our word for it. Check out these three names:
Appreciate what these three volatile and widely followed price charts are saying in a market still plagued by Covid-19 and in a ‘new normal’ or otherwise going forward.
Stocks to Buy: Netflix (NFLX)
Source: Charts by TradingView
Streaming-on-demand video giant Netflix is our first stock to buy. NFLX stock’s pullback has deepened marginally on the heels of last night’s mixed earnings release. But while bears and profit-takers have control of the play button on Wednesday, this “new infrastructure play” deserves the benefit of the doubt from bullish investors.
On the price chart, Netflix remains a market-leading name after breaking out from a massive high-level, corrective double bottom base. The breakout is being challenged as shares test the pattern’s prior high from 2018. But it’s far from the end of the world for this stock to buy. It’s an opportunity.
Today’s pullback in Netflix offers investors a second chance to purchase constructive price weakness. Our interpretation of the weekly chart is that shares can continue to pull back for upwards of several more percent without taking away the integrity of the bullish base. As long as NFLX stock maintains its technical composure by holding above the base’s 76% and mid-pivot from roughly $377 – $387, this is a stock to buy on weakness.
Zoom Video (ZM)
Source: Charts by TradingView
The next name on our short list of pullbacks is Zoom Video. Similar to Netflix, the teleconferencing upstart could be hailed as another new infrastructure play. Likewise, ZM stock’s bullish growth narrative and healthy basing structure make this a stock to buy.
Technically, price weakness over the past couple sessions has allowed Zoom shares to form a nice contraction. Following a successful test of it’s larger cup-shaped breakout and sandwiched just above the 50% retracement level, many growth traders will recognize the net price action reveals a bullish cup-with-handle pattern.
Bottom line, this pullback is a stock to buy on a breakout above pattern resistance of $155.
Square (SQ)
Source: Charts by TradingView
The final stock on our short list of pullbacks is mobile payments upstart Square. But unlike our other stocks, which show strong bullish pattern evidence, SQ stock hints that modest pressure this week could be start of something much larger and more profitable for bears.
As a notoriously volatile stock, bears and bulls can extract large profits from Square. Even on a daily basis, that point is made abundantly clear. Moves upwards of 8% to 10% are quite common. But the weekly chart favors bearish positioning. The observation is shares have established a counter-trend pullback off the March low. And as Square challenges resistance from its prior up-channel, it could become an end of days of sorts for bulls.
For initiating a bearish short, I’d recommend investors wait on last week’s doji to fail. That could happen in the next couple sessions if this week’s candle turns into a bearish engulfing pattern below $56 in SQ stock. I’d also suggest respecting Monday’s high of $63.59 and using a limited-risk options strategy in the event today’s “new normal” doesn’t pan out and bulls get back to business in Square.
Investment accounts under Christopher Tyler’s management owns positions in Square (SQ) and its derivatives, but no other 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 market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
