Mobile payment stocks like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) are taking flight, rallying 2% and 4% on Tuesday, respectively. The gains come on the back of a tech rally that refuses to die. Since SQ stock is the bigger gainer and better looking of the two, we’re focusing on how you can trade it right now.
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If you thought the arrival of the Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) splits would finally slow the meteoric rise in the Nasdaq, you’re in good company. But you’re also wrong.
Tuesday’s 1.7% launch in the PowerShares QQQ Trust (NASDAQ:QQQ) shows the much-anticipated splits have done nothing to slacken demand for technology stocks. Not yet, at least. Forecasting when the current upswing in QQQ will end continues to be an exercise of frustration.
It’s insanely overbought, no doubt. But the virtuous momentum cycle is feeding on itself. Consider the stats of the advance. Since pivoting off of the rising 20-day moving average on Aug. 11, QQQ rallied for 15 sessions. There were only three down days along the way, and each of those was short-lived and shallow.
So, what’s it mean for SQ? Well, it’s bullish. Square has the good fortune of residing in the strongest sector on the planet. That’s a tailwind that can’t be borrowed or bought. And it’s one of the reasons why the price trend in Square has been so consistent and long-lasting.
Tuesday’s breakout was born on the back of the rally. If the Nasdaq suffered a rug-pull following the twin splits mentioned above, then I virtually guarantee SQ stock wouldn’t be flying 4% higher.
Let’s take a closer look at the chart.
SQ Stock Chart
The first thing that jumps out is just how reliable the 20-day moving average has been. Moving averages are the ultimate trend-following indicators. When used properly, they can keep you on the right side of the trend until the end. Note how many times SQ has pulled back and bounced off of the 20-day since April.
The pattern developing over the past few weeks was a mini cup and handle formation. Resistance at $160 held firm for days, but ultimately, bulls won the contest, and we’re seeing their victory dance right now. Spectators have to be cheering (and likely chasing) the breakout here, if for no other reason than Square’s reputation for rewarding breakout buyers.
In the daily chart, I’ve labeled all previous resistance zones to illustrate just how consistent the upside follow-through has been following each breach.
There’s always the chance that the current pop is finally the one that fails. But I wouldn’t bet on it! Since we’re basking at record highs, projecting a target is more art than science. Rather than worrying about the ultimate destination of the trend, I suggest focusing on building an options trade that simply gets you exposure to the upside.
Two Trades to Consider
Implied volatility is pushing higher alongside the price. The IV Rank now sits at the 34th percentile. It’s high enough to make spreads more attractive than buying calls. Bull call spreads, and bull puts are both attractive here. It just comes down to the desired probability of profit and payout.
Bull Call: Buy the Nov $170 call while selling the Nov $180 call for a net debit of $3.90.
The risk is $3.90, and the reward is $6.10. The probability of max profit is nearly 50%.
Bull Put: Sell the Oct $145 put while buying the $135 put for a net credit of $2.30.
The risk is $7.70, and the reward is $2.30. The probability of max profit is 79%.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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