If you want a headline for Tuesday’s trading, it’s this: small-capitalization stocks get wrecked. There’s some hyperbole in it, to be sure, but you can’t deny the nasty relative weakness suffered by the Russell 2000 Index. Though the S&P 500 closed near unchanged on the session, RUT was down 2%. Despite the drubbing, the overall uptrend remains intact. And that’s a great place to seek out the best stocks to buy.
Large swaths of the market came into this week basking at record highs. Even many that weren’t at all-time highs, were near 52-week highs and had uptrends with strong momentum. In my experience, those circumstances provide the best dips to buy.
To find today’s candidates, I ran a simple scan looking for stocks exhibiting the above characteristics. Rather than focusing on a single sector, I went the diversified route and came up with a solar stock, a fresh IPO, and an online marketplace company that’s been red-hot since the global pandemic kicked-off.
Check them out.
We’ll follow my galleries’ usual path with a quick look at the chart to build the bullish case and then a compelling options trade.
3 Stocks to Buy: Canadian Solar (CSIQ)
Solar stocks have been on fire this year, and their momentum only increased after the presidential election. The Solar ETF (NYSEARCA:TAN) is up five-fold since its March low. The Street expects big things for the industry under a President Joe Biden administration.
Canadian Solar turned up as one of the better-looking setups in the space. It spent much of the fourth quarter building a trading range before finally breaking out in mid-December. Profit-taking struck this week, creating the first pullback opportunity we’ve seen since the launch. Given the increased volume and momentum seen during the last upswing, I’m betting this is a buyable dip.
Implied volatility is high enough to make bull put spreads interesting if you want a higher probability of profit.
The Trade: Sell the Feb $45/$40 bull put for $1.20 credit.
2020 was the year that Airbnb finally came to market. Some will argue it’s overvalued given the hefty share price and market cap, but that’s hardly unique. It’s a zero interest rate world with stimulus as far as the eye can see. Just about every sector in the market looks expensive. Besides, I’m not pitching an investment but a trade.
With only three completed trading sessions, there’s not a lot to go off, but I like the price trajectory so far. We officially formed a higher pivot high by successfully breaching the IPO day’s high during the last upswing. The five-bar pullback that just developed now gives us the chance to build a higher pivot low.
If buyers emerge and push prices above $153, then bull trades have a green light.
The Trade: Buy the Feb $160/$170 bull call spread for around $3.
Etsy rounds out our hat trick of stocks to buy with a picture-perfect bull retracement. Its uptrend this year has been a juggernaut delivering a ton of opportunity. What I love about the current pattern is it’s clean. We just saw a strong upswing to create a higher pivot high and show the trend is continuing. Now, we have a four-bar pullback to the rising 20-day moving average on relatively light volume.
Tuesday saw a small-bodied candle form to suggest the pullback was slowing and support was forming. This morning we’re seeing prices start to turn higher as buyers finally emerge to buy the dip.
I like bull call spreads for a low-cost upside bet.
The Trade: Buy the Feb $190/$200 bull call for $3.00
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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