Traders returned from the holiday weekend in a mood for both selling and buying. Unfortunately, for Paypal (NASDAQ:PYPL), it fell prey to the former motivation. As you’ll soon see, the digital payments juggernaut got caught up in a wicked twister of rotation on Monday. Though bearish in the short run, the now three-day pullback should be embraced by Paypal stock followers. It’s creating a much more compelling entry point than was available heading into Christmas.
As with all stocks basking near record highs, all previous pullbacks were made to be bought. Sure, this time could be different, but why bet on it? The odds favor this retreat following in the footsteps of its predecessors.
In other words, don’t fight the trend. On a side note, I’m not even sure we can call a three-bar drop a dip, for that matter. We’re only 3.5% off the highs.
More on the technical setup in a bit, but first, let’s explore the epic rotation seen on Monday.
A Wicked Twister of Rotation in PayPal Stock
Don’t let the S&P 500’s record close on Monday fool you. Momentum stocks were taken to the woodshed. Paypal got caught up in the profit-taking, though it didn’t fall near as far as some.
The following five stocks were among the top losers on the session: Palantir (NYSE:PLTR), Shopify (NYSE:SHOP), Zoom (NASDAQ:ZM), Peloton (NASDAQ:PTON), Etsy (NASDAQ:ETSY).
Every one of them was down over 6% on a day. Do you know what they have in common? They’re some of the biggest winners of 2020 and absolutely loved by momentum traders.
It remains to be seen if this is the beginning of a bigger shift away from high beta growth stocks or simply shaking the trees ahead of year-end. One thing that keeps me optimistic is the rotational nature of market performance. Instead of seeing equities as an asset class take it on the chin, we saw large-caps soar while red-hot momentum darlings finally cooled.
The rush was particularly potent with the tech titans of the world. Apple (NASDAQ:AAPL) is the poster child with its share price rising by 3.6%.
So what’s this have to do with Paypal stock?
As mentioned in the intro, it got lumped in with the momentum names. This should surprise no one. Its share price has exploded this year alongside rapid earnings growth.
Paypal Stock Charts
Rather than slowing into year-end, we’ve seen strength surge during the past two upswings. That, more than anything, has me interested in shopping the current dip. Two potential support zones are catching my eye. The first is the rising 20-day moving average near $225, another $10 lower. The second is the old resistance pivot at $220. We’ll need further selling before testing either level, but if we do, watch for evidence of a floor forming, then pounce.
At the risk of reading too much into holiday hampered volume, I like how recent participation patterns are supporting bulls. Volume during the rally increased with a few accumulation days forming. By comparison, activity during the three-day dip has been subdued. Light volume pullbacks like this are ideal.
Be Patient, Then Pounce With Call Spreads
My trade idea will require some patience and further selling in PYPL before it’s ready. Implied volatility is low at the 24th percentile and will likely head higher as we move closer to the early-February earnings report. That, coupled with a desire to deploy bullish trades into weakness, leads me to a bull call trade idea.
The Trade: Buy the March $250/$260 bull call spread.
It’s currently trading for $3.25 but will get cheaper if PYPL drops into the $220 to $225 zone.
On the date of publication, Tyler Craig had LONG positions in AAPL, and PLTR.
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