PayPal (NASDAQ:PYPL) was one of the best-looking stocks on Wall Street ahead of last week’s earnings announcement. But afterward? It looks even better. Thursday’s monster gains came despite the digital payments processor falling short of analyst expectations. If anything, the rip reveals just how willing market participants are to overlooking minor missteps for PYPL stock.
Today we’re taking a fresh look at PayPal’s post-earnings posture and providing a high-odds trade idea for capitalizing.
You can check out the earnings highlights here. Interestingly, the knee-jerk reaction by the market on the earnings whiff was to slam the stock down 6% in after-hours trading. However, once the conference call began, PYPL stock quickly recovered. By the next morning, the 6% loss had morphed into a 9% gap higher.
It’s not often that you see that large of a turnaround.
The Bigger Picture on PYPL Stock
I’ve written dozens of articles on various stocks that mention the epic rebound off of March’s lows. And yet, I still find myself impressed by a run like PayPal’s.
With last week’s moonshot, the stock has climbed 79% in seven weeks. That translates into a mouthwatering annualized gain of 586%. It’ll never happen, mind you, but it does reveal just how bananas the ascent has been.
The weekly time frame finds itself well above its old record, courting virgin territory. Three of the past four weeks have seen accumulation, and the weekly relative strength index just touched the overbought zone for the first time since last July. With volume and momentum at its back, this is a long-term uptrend you bet against to your peril.
Now, it is fair to say things have gotten frothy. I, for one, would welcome a pullback or some consolidation as it would create a lower-risk entry. For the high definition version of its price behavior, let’s turn to the daily chart. Drilling down will allow us to better identify the next potential support or resistance levels that come into play.
PayPal’s Daily Chart
Given the speed of PayPal’s rocket ship ride, it hasn’t left many support zones along the way. A retreat from here brings the gap area into play first. The low end of the gap bar is $139, approximately $5 lower than Monday’s closing price.
That’s the first area I would expect dip buyers to defend. If we begin to fill the gap, there isn’t any price history until you fully close the window down at $129. To summarize, $139 and $129 are the two zones to watch if profit-taking strikes.
Thus far, however, PYPL stock is holding firm to its gains. The past two trading sessions have seen minimal selling pressure as the stock has drifted near its highs. Perhaps the best-case scenario is to see the stock consolidate at its highs for another few days and create a high base pattern to trade a breakout from. Building pressure below Thursday’s high of $147.20 would make for a compelling setup.
Trading With Bull Puts
Implied volatility quickly dropped after earnings, driving the implied vol rank to 19%. It makes it tricky to pull the trigger on bull put spreads given the lack of credit, but I could see one trade worth waiting for if you’re seeking a high probability path.
The Trade: Sell the June $125/$120 bull put spread for 55 cents.
You’ll need PYPL stock to retreat for a day or two before getting filled, but there’s nothing wrong with floating a limit order out there to see if the price comes to you. If filled, consider this a bet that PYPL will be above $125 at expiration. Given the stock’s strength, this seems like a no-brainer.
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