Special purpose acquisition companies have certainly made a bit of hay this year for some investors. But one SPAC, Switchback Energy Acquisition Corp (NYSE:SBE), which some see as heads and shoulders above the competition, could be a name that’s best to avoid? Let’s see what’s happening off and on the price chart for SBE stock, then offer a well-aligned risk-adjusted determination based on those findings.
Sometimes, better late than never works out. Ballot counts are one example straight from this morning’s headlines. Our sitting President of course would undiplomatically digress. Still, and with investing, being late can be trickier and cause for alarm. Take Thursday’s rally.
The S&P 500 index was up a bit more than 2% intraday on Thursday before slipping yet still closing up 1.95%. Great, right? The problem is investors are buying into a market which has quickly jumped more than 9% in five straight sessions from its recent fearful lows as Wall Street continues to cheer a dismantled blue wave, or what I’ll refer to as the Biden Gridlock Tour.
But while purchasing diverse companies like Apple (NASDAQ:AAPL), Visa (NYSE:V), Home Depot (NYSE:HD) or other blue-chips might carry a bit more short-term technical risk as enthusiasm likely retreats in the coming days, those companies are also highly likely to continue making America great and should be in investment accounts for the future.
But owning SBE stock today is decidedly different.
Next Big Things
For many investors looking to locate the next, next big investment opportunity, there are several familiar names. DraftKings (NASDAQ:DKNG). Nikola (NASDAQ:NKLA). Virgin Galactic (NYSE:SPCE). Workhorse Group (NASDAQ:WKHS). Each has reached a level of notoriety, become very well-traded in 2020 and maybe even turned into a longer-term holding, intentionally or as unintended investment.
It’s not exactly a secret DKNG, NKLA and SPCE stock each rode a “green wave” of enthusiasm earlier this year on the back of SPACs or blank check companies, turning into the investment flavor of the day on Wall Street. Each was early to the scene while also boasting unique business propositions. But the environment for SPACs has grown increasingly risky and that goes for SBE, as well.
For SPAC investors that clung too strongly to the siren song of owning the next Netflix (NASDAQ:NFLX) or Tesla (NASDAQ:TSLA), regret of massive paper profits going “poof!” or worse, substantial losses, have entered into the equation. So it is that 2020’s summer party has turned into a massive and ugly hangover with corrective declines upwards of 75% over the last quarter, including DKNG, NKLA and SPCE stock.
To be fair, stocks correct all the time. That’s goes for AAPL, NFLX, TSLA and other celebrated long-term, blue-chip winners. And within the SPAC market’s diverse pool of businesses, surely there will be survivors. There’s bound to be even a couple companies which go on to thrive and provide big-time returns for their shareholders.
However, the fast money tsunami of SPAC offerings which lifted many of those previously unknown stocks to ultra-quick and dazzling returns has turned course.
And right now, a less-attractive SPAC environment is a larger challenge for SBE stock. And, yeah, that’s despite the company’s pending reverse merger with ChargePoint that would make the combined outfit a leader within the EV charging market, and theoretically, propelling shares by as much as 400%.
SBE Stock Daily Price Chart
Source: Charts by TradingView
The observation, aside from being a bit late to 2020’s overplayed SPAC party, is SBE stock also has its work cut out on the price chart. Technically, and from a purist standpoint, shares are in the process of forming a head-and-shoulders topping pattern after bursting onto the scene in September. It’s potentially bearish if the right shoulder continues to develop, then breaks beneath neckline support.
Given those conflicts, I’d hesitate to enter into a long position in SBE stock. However, there might be a bit of room for speculating on a more bullish outcome. It’s also one which could be relatively close at hand.
Looking forward, I’ll be watching to see if SBE can muster enough technical strength to fail or break the head-and-shoulder by trading above the left shoulder’s $16.45 pivot high. If it does, buying an out-of-the-money bull call spread safely removed from dreams of returns approaching 400% in shares is a sensible approach to a more speculative investment of this caliber.
Should that day arrive sometime soon, one favored combination of this type, and one which could capture less-dreamy returns approaching 400%, is the February $17.50 / $22.50 call spread.
On the date of publication, Chris Tyler held, directly or indirectly, positions in DraftKings (DKNG) and its derivatives, but no other securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
