Pfizer (NYSE:PFE) is all over the headlines as the U.S. begins rolling out the first doses of its novel coronavirus vaccine. But if you think the news is sending investors into a frenzied buying spree of Pfizer stock, think again.
PFE stock was down 4% in mid-day trading Monday amid heavy selling pressure. Looks like a case of the old “buy-the-rumor, sell-the-news” phenomenon.
Today we’re taking a closer look at how you should go about buying this welcome dip. The short version: last month’s rip-roaring rally lifted prices into a compelling uptrend. And that alone makes PFE a buy into weakness.
Pfizer Stock Charts
It’s easy to get caught up in the excitement of the headlines and bullish sentiment surrounding Pfizer this week. The record pace that a vaccine was developed and made available is a huge win for humankind.
But before making any decisions, we have to analyze price first. To put this week’s drop into context, let’s start with the weekly time frame.
As for most equities, November was a game changer for Pfizer stock. Heading into the month, prices were stuck in a trading range between $34 and $37. The 10%-wide box was a bitter stalemate with neither bulls nor bears able to gain the upper hand.
But after reporting great results from its vaccine trials, Pfizer stock shot to the moon. Though the initial gap was met with sellers, it still kickstarted an uptrend which continues to this day.
Last week tested the old resistance zone near $43, which resulted in the formation of a higher pivot high to confirm the nascent trend is continuing. The volume explosion over the past five weeks reveals heavy accumulation. It’s the type of participation that leads me to believe the new uptrend has staying power. Couple that with the fact there’s now a lot of potential support beneath the current price and we can make a convincing case that buyers will emerge to defend the trend at lower prices.
You can see momentum increased on the last advance more easily on the daily chart. Note how the 20-day moving average separated from the 50-day due to the sharp price increase. Now, a four-day pullback is developing with Monday’s candle being the largest of the four. The 20-day looms close near $39 as the first potential floor.
Deploying bullish trades after such a large red candle is challenging, so be on the lookout for a reversal candle to confirm bulls are returning. That could come as early as Tuesday or Wednesday.
Once we have some evidence that the pullback is petering out and a new upswing is beginning, then I think you can enter bullish trades, though I prefer selling naked puts. That way, if Pfizer simply settles in here instead of aggressively rising, I still profit.
Implied volatility increased alongside the stock last month, pushing it to the 40th percentile. It’s one of the few stocks out with such a high reading, and that increases the potential payday for selling puts.
For the uninitiated, when you sell a put, you obligate yourself to buy 100 shares of stock at the strike price. But you only have to make good on the promise if the put sits in-the-money at expiration. If it doesn’t, then the contract expires worthless and you get to pocket the original premium received.
If you’re a willing buyer of Pfizer stock near $36, or if you simply think it will stay above that price for the next month, then here’s the trade to make:
The Trade: Sell the Jan $36 put for 55 cents.
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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