Virgin Galactic (NYSE:SPCE) shares blasted off on Thursday, soaring almost 16% on more than four times the average trading volume. But those seeking to pin a cause on the effect are at a loss. It appears the gains lack a clear catalyst, a root cause. How dare buyers randomly ramp SPCE stock into the stratosphere when no one was looking, and the news feeds were quiet!
Sarcasm aside, there are some interesting investing lessons hidden in today’s unplanned launch. We’ll explore them below, provide a fresh look at how the breakout is changing the SPCE stock chart, and suggest two trade ideas for profiting.
It’s the What not the Why
Let’s get a few things straight. First, stock prices don’t rise or fall based on news. They move based on supply and demand. The reason Virgin Galactic is rocketing to orbit today is simply that demand is overwhelming supply. That’s it. The inverse is true on down days. But admitting to this fact is far from satisfying. It doesn’t sate your intellectual curiosity because what you were really asking was why there was so much demand. What drove all those people to chase SPCE with such wild abandon?
If you’re a faithful follower of technical analysis, then you shouldn’t care why the price is rising. The fact that no one has yet spun a compelling tale for what’s whipping up all the demand doesn’t matter one bit to me. It’s bullish, Period.
SPCE Stock Breakout
The first thing that caught my attention about the Virgin’s behavior was how incredibly bullish it was on a relative basis. It’s one thing to rise on a day when the rest of the market is strong, but when you do it while small-caps are crumbling and the S&P 500 index deep into the red, it’s all the more impressive.
Ever since its March crash, SPCE stock has been dead money. Momentum traders tiring of its sleepy ways have long departed in search of easier money elsewhere, but you better believe they’ve kept this ticker on their watchlists. It’s too juicy a target when it started trending to abandon forever.
And, while there may not be a fundamental or news-driven catalyst, there definitely was a technical one. Today’s jump breached multiple resistance zones, signaling to chart watchers that momentum has finally returned, and a new uptrend could be in store.
Moves like this often spark a virtuous cycle. Higher prices attract fresh buyers, and fresh buyers generate higher prices. The next ceiling is $21.60 and marks the high point of its post-March range. I think that’s the first logical target. A push through it would signal an even bigger breakout, but let’s see what kind of follow-through we get to today’s rally first.
Aside from a simple breakout, Thursday also signaled the end of a multi-month volatility compression. The ever-tightening pivots formed a coiled spring pattern that finally unleashed the pent-up energy.
Options Vol Goes Boom
Bulls didn’t just pile into the underlying shares, they also stampeded into the options market. Sharp, sustainable moves in stocks are often accompanied by a surge in demand for derivatives as speculators seek a cheaper and lower risk instrument to place their bets. Implied volatility is the go-to metric for measuring just how aggressive buyers are bidding for contracts. Today saw ImpVolatility jump to 131%, officially reversing the long slide we’ve seen in recent months.
I have two trade ideas to consider.
Stock Trade: Buy SPCE shares with a stop below Thursday’s low of $17. If we’re unable to hold the gains, it makes sense for short-term traders to bail.
Options Trade: Sell the Aug $17 puts for around $2.35. You’re getting paid a boatload of premium and will profit even if the stock stagnates from here.
Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler didn’t hold positions in any of the aforementioned securities.
