Monday’s market session was the best we had seen in six weeks, which usually means prices are at least slightly over-extended. Very often this leads a reversion to the mean (where prices move back towards the short-term average).
The market started to pull back yesterday, and though it could fall further, futures are pointing higher this morning.
If you, like us, have been holding shares of Nike (NASDAQ:NKE), today’s push higher is a great opportunity to sell calls to collect extra income on the stock.
On Yesterday’s Pullback and Today’s Optimism
Traders seemed pleased by U.S. Treasury Secretary Steve Mnuchin and Fed Chair Jerome Powell’s testimonies before Congress yesterday.
According to Powell, the Fed is ready to use every “weapon in its arsenal” to help the economy. Mnuchin is forecasting that all funds available for emergency lending from the Fed will be deployed.
The goodwill bought by the testimony to Congress from representatives from the executive and monetary policy arms of government couldn’t stop the market from reacting badly to a report questioning Moderna’s (NASDAQ:MRNA) promising vaccine results from Monday.
While at least part of the pullback was technical, the report did diminish some people’s hopes for a solution to the COVID-19 problem.
We’re also still dealing with unknowns around the passage of more stimulus through the fiscal side of the government — Congress. The House of Representatives passed another stimulus bill, but Senate Republicans are hesitant about taking it up.
This morning, the market seems to be pointing higher on some better than expected earnings reports from Lowe’s (NYSE:LOW) and Target (NYSE:TGT), meaning there is at least a little enthusiasm for consumer-adjacent stocks.
The Top of its Channel
Yesterday, while the rest of the market was falling, NKE was tapping the top of its sideways channel. There is a good chance it falls slightly in the short term, making this a great opportunity for us to sell a covered call.
The stock has been gradually pushing higher, and we do expect it to gain value, but in the short term, selling a call with a strike price above the bottom of the gap NKE formed in February is a great way to collect extra income without taking on too much risk.
Daily Chart of Nike, Inc. (NKE) — Chart Source: TradingView
Our strategy of selling calls at the highs and buying them back at the lows has allowed us to compound our income from NKE over a relatively short period of time. We may even have an opportunity to roll this position out in the next few weeks.
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.