My indicators are giving bullish readings this week, and with the possibility of a pullback looming over the market, I want to recommend a bearish position on Norwegian Cruise Line Holdings Ltd. (NYSE:NCLH).
While over 30 million people are newly unemployed and our economy is teetering on the edge of falling into a depression, the likes of which we haven’t seen since the 1930s, the snap-back rally from oversold conditions has continued this week.
And while rebound rallies can last much longer than investors expect, especially in the face of a global pandemic, it does seem that the current rally is beginning to lose some steam. It is prudent to put on a little bearish protection in the face of a period of consolidation, and investors may look to shed shares of cruise stocks in the short term.
Approaching a Moving Average
In the chart below, you can see the S&P 500 approaching the underside of its 200-day moving average. You’ll also notice the S&P 500 index has respected the 200-day moving average (blue line) as a support level several times over the past year. There was even some consolidation at this level before the big drop in March.
Daily Chart of S&P 500 Index (SPX) — Chart Source: TradingView
However, with the S&P now below its 200-day, that level could very well act as resistance rather than support. You’ll notice that the index doesn’t always touch the moving average perfectly, and at the high on Wednesday the S&P was only about 1.5% away from the moving average. So it could already be coming into play a bit.
NCLH is a good candidate for a bearish put trade if the market does pull back because the cruise industry has been hit hard by this pandemic.
The Centers for Disease Control and Prevention (CDC) banned new voyages until July, and according to Reuters, Australia has linked its COVID-19 outbreak to a CCL cruise. Over 30 million people in the U.S. have lost their jobs, meaning they won’t be going on any cruises for a while.
But NHCL, RCL and CCL have risen for some reason. Initially, the rally in these stocks looked like a short-squeeze rally, but because they haven’t come back down, its possible investors are taking a longer-term view.
But in the face of another pullback, would investors want to hold onto stocks that are this vulnerable?
NCLH has also risen to a recent resistance level at around $17, and its 50-day moving average is hovering just above that level. As already mentioned, moving averages can act as resistance and support, so NHCL has that much more to overcome.
Daily Chart of Norwegian Cruise Line Holdings Ltd. (NCLH) — Chart Source: TradingView
Bearish put trades are a good way to add a little protection to your portfolio during such a volatile time. By picking a stock in a vulnerable industry and with a less-than-stellar technical picture, traders can increase their chances of collecting a profit if the market doesn’t pull back.
Buy to open the Norwegian Cruise Line Holdings Ltd. (NCLH) June 19th $12.50 Puts (NCLH200619P00012500) at $1.55 or lower.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.