Square (NYSE:SQ) shares are jumping 4% today on the back of a price target increase by Citi. Of course, the rally in the broader stock market that has the S&P 500 ramping nearly 2% is also lending a hand to SQ stock’s bullish ambitions. Let’s take a closer look at the details and build out a trade to capitalize.
Citi analyst, Peter Christiansen, lifted his price target for Square stock from $66 to $95 while maintaining the firm’s “neutral” rating for the company.
Honestly, the ebullient stock market is forcing Citi’s hand. Square closed yesterday at $91 and had already blasted well north of the $66 target. It’s challenging to have a “neutral” rating when your $66 objective is 27% below the current price level. In his research note, Christiansen cited fundamental factors such as strength in Cash App metrics, a recovery in gross payment volume and benefits from the Paycheck Protection Program to support the target increase.
Fundamental metrics aside, the price action in SQ stock is what really tells the tale. Investors have loved the stock for months, and it has one of the prettiest and most persistent uptrends on the Street.
SQ Stock Charts
Square was on the verge of breaking through significant resistance before the novel coronavirus came to town.
March’s meltdown tore a gaping hole into the chart by reversing the last two years of gains. But, as we now know, the pain was temporary. You can see the mighty “V”-shaped rebound in the weekly chart. We’ve returned to the scene of the pre-Covid-19 breakout attempt and succeeded where the prior bid failed. At $95, SQ stock is now only 6% below its all-time high. I suspect the $101.15 peak will serve as a magnet, sucking the shares higher in the coming weeks.
Turning to the daily chart reveals just how consistent the uptrend has been. The 20-day moving average serves as a good proxy for the ascent. It has been pushing higher and providing support all along the way. Monday’s test was the latest example of how vigorous bulls have defended this support zone.
Volume patterns have confirmed buyers’ dominance. Distribution days are all but absent, and accumulation signs have cropped up to reveal institutions trickling in. Recent price action has taken on the form of a high base pattern. Monday’s powerful bullish engulfing candle suggested a breakout was imminent.
Even without the price target lift, Square was poised for a pop heading into today.
How to Double Your Money
One of my favorite strategies for gaming an aggressive breakout setup like this is the bull call spread. Structured properly, the trade can offer a potential 100% to 150% return on investment. Since the century mark is so close, we’ll use that as the target and build a spread that will double our dough if we get there by expiration.
The Trade: Buy the July $95/$100 bull call spread for $2.10.
Also known as a long call vertical spread, the bull call offers a cheaper alternative to buying calls outright. By selling the $100 call against our $95 call, we lower the cost from about $6 to $2. At the same time, we’re enhancing the leverage around the current price while increasing our probability of profit.
The expiration breakeven is $97. If Square stock sits below $95, then both calls will expire worthless, and we incur the max loss of $2.10. The max gain is calculated by subtracting the spread cost from the spread width. In this case, it’s $2.90 ($5 – $2.10). To capture the entire profit, we need SQ to push above $100 by expiration.
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.
