Virgin Galactic (NYSE:SPCE) defied gravity yet again Tuesday, extending its already eye-popping gains another 8.5%. It’s an impressive showing after Monday’s drop and proves there are still willing buyers even after such a strong run in SPCE stock.
That said, I think caution is warranted at this stage for two reasons.
The first is its technical posture. SPCE stock is overbought and offers a poor risk-reward balance for new buyers. The second hurdle is the fast-approaching earnings report, which could inject a dose of reality into Virgin’s red-hot run.
Nasdaq Spells Momentum
It’s impossible to discuss the awakening of SPCE stock without acknowledging the beautiful bullish backdrop in all things tech. Virgin Galactic is one of the boats that the Nasdaq Composite’s rising tide has been lifting. I gushed about the undying bid beneath tech stocks in Tuesday’s post about Nvidia (NASDAQ:NVDA) and would argue the same narrative is giving traders the confidence needed to chase after a more speculative stock like SPCE.
Last week’s retreat marked the eighth time the ProShares QQQ ETF (NASDAQ:QQQ) has pulled back toward its rising 20-day moving average and bounced. The wind is at the back of equities, so why not buy the likes of Virgin Galactic when it offers a textbook breakout pattern?
Though there may have been news adding to the strength behind SPCE of late, I think it had the muster to rise unaided. The weekly view nicely illustrates the appeal of the recent breakout. From April 2020 until this month, SPCE found itself building a $6-wide base between $20 and $14. Participants found equilibrium, and there weren’t any catalysts strong enough to start a trend. The May earnings report certainly didn’t provide any fireworks.
The benefit of such a long-term consolidation is it allowed an easy-to-spot ceiling to form at $20. What’s more, because the drop from its $42 peak was so dramatic, there weren’t any resistance levels to contend with once the price finally rose back above $20.
This is a killer combination. Hot momentum stock plus clean breakout plus room to run equals magic. Unfortunately, this tells us much about was has happened and little about what’s to come.
SPCE Stock Is Hot, But It’s Overbought
Successful trading is all about finding asymmetric opportunities. We seek setups where the risk is small relative to the potential payout. I’d peg $28 as the next upside target. It’s a resistance level from March and is the next reference point. After that, $40 comes into play.
Now that we’re within $3 of the first target, there isn’t much room left for the current upswing. The overbought conditions are also echoed by the RSI indicator which has risen to 73. Even if we use a tight stop such as Tuesday’s low, the risk-reward ratio still falls short.
Even without the uncertainty of earnings coming around the corner, the chart doesn’t support new entries here. I suggest sitting on the sidelines to wait for a better pitch. A pause or pullback toward $20 would do wonders in creating a more attractive entry.
Normally, I’d throw out a naked put idea as an alternative if you want to get paid to buy shares at a lower price. But if SPCE stock drops in the coming days the put values will increase, allowing you to sell them for a higher price. Keep an eye on the Aug $18 strike. If you want a higher probability play after some type of retreat, then it’s the option I’d consider selling.
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.