I find this year’s behavior in Uber Technologies (NYSE:UBER) shares utterly fascinating. Uber stock is a poster child, a prime example of how asset prices often defy logic. It also underscores why I favor technical analysis over anything else.
Read on to learn what I’m talking about. I’ll also share two bullish strategies for how you can bank on further gains in Uber stock.
It’s Ugly Out There
If you look at economic trends and fundamentals, you’d rightly argue that Uber should be a shell of its former self. Mobility has ground to a halt. No one wants to travel with the novel coronavirus still lurking invisibly around every corner. Shelter-in-place orders and social distancing trends have torpedoed demand for the ride-hailing giant’s services.
To be fair, its food delivery segment has benefited from the growing throng of people stuck at home, but it doesn’t make up for the dramatic decline elsewhere.
Earlier this month, the company reported an adjusted loss of $2.9 billion, marking its second-worst quarter since going public. How much do you think Uber should be down given the horror show? 30% to 40%?
Not even close.
Shares of the San Francisco-based company are up 15% for 2020. It’s incredible and speaks to just how willing Wall Street is to look past the Covid-19 drama. Investors are banking on March and April being an aberration, a hiccup unlikely to change the long-term prospects of Uber.
Now, for a few caveats.
First, the stock got torched during the initial market plunge. From peak-to-trough, it fell a total of 67% or roughly double the damage suffered by the S&P 500. Therefore, its sensitivity to the halt in travel did make a big impact. It’s the speed and magnitude of the recovery that’s the head-scratcher for those trying to pin a “why” to the “what.”
Second, even though Uber stock is up 15% year-to-date, it is still 18% off its February high, so it is trading lower than where it was before the global pandemic.
In Praise of Technical Analysis
Trying to justify the price comeback with the still grim fundamental outlook is akin to jamming square pegs into round holes. It just doesn’t work. But therein lies the advantage of focusing on technical analysis.
As price followers, we don’t get caught up in the reasoning behind why prices are rising or falling. We follow price, not stories. It keeps life simple by sidestepping situations where a stock’s behavior doesn’t seem to match up with what’s going on in the real economy.
Uber Stock Price Chart
Despite an underwhelming earnings report that could have pulled the rug out from under Uber stock’s recovery, investors clung to the hope that the worst was behind the company. With the post-earnings push higher, the stock has now climbed back above its 200-day moving average. Since it was already above the 50-day and 20-day, buyers have officially wrested control of the stock across all time frames.
Volume patterns are buttressing the strong price performance. I count five separate accumulation days over the past three weeks. These high volume up days suggest institutions have been piling in and is a bullish omen. If we can take out resistance at $35, then a run to $40 is a very real possibility.
In selecting which options strategy to use, you have two choices. You could build a higher reward trade with a lower probability of profit. Or, you could enter a higher probability trade with a lower reward. The first is more aggressive, the second more conservative.
Aggressive: Buy the July $35/$40 bull call spread for around $1.70. The risk is $1.70, the reward is $3.30, and the probability of max profit is 27%.
Conservative: Sell the June $32/$27 bull put spread for 90 cents. The risk is $4.10, the reward is 90 cents, and the probability of max profit is 70%.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler didn’t hold positions in any of the aforementioned securities.
