2020 has been a banner year for the markets, with a number of high profile, high flying IPOs despite the global pandemic. And among those newly public names, Palantir (NYSE:PLTR) is the poster child for big-winning, freshly minted companies.
Since bursting onto the scene at a mere $10 per share of PLTR, this software company has more than tripled in less than two months. Not bad.
It’s a wildly unsustainable trajectory, but tell that to the traders who are departing their Palantir stock positions with pockets full of cash.
Still, prices have cooled in recent weeks as inevitable profit-taking has struck. Rather than suffering a steep drop, however, Palantir stock has undergone an orderly time correction.
In other words, prices have largely stagnated while the 20-day moving average has played catch-up. The pausing pattern has taken on the form of a symmetrical triangle. And that gives us an idea of how to trade PLTR stock.
Implications of a Triangle Pattern
For newcomers to the world of chart reading, a symmetrical triangle reflects neutrality. It’s created by a series of higher pivot lows and lower pivot highs that create competing trendlines. The lower highs suggest increased seller aggression. At the same time, the higher lows reveal increasing demand beneath the surface. Both signals effectively cancel each other out, creating a stalemate.
And yet, the tie doesn’t last forever. At some point — typically as we approach the triangle’s apex — one party takes control and a breakout ensues. In Palantir stock’s case, I suspect the break’s direction will be higher, not lower. This is due to the overall uptrend that remains intact. Prices ran too far too fast, and the triangle allowed buyers to rest and digest the gains.
Once the weak hands are shaken out, and the bulls’ strength returns, the overall uptrend should resume.
In timing new entries, you have three choices:
- Enter now in anticipation of an upside break. This will give you the best price but the least amount of confirmation.
- Wait for prices to rise above the descending trendline. Currently, it’s around $28.50. This provides some evidence that buyers have finally broken the stalemate while not waiting too long before deploying a bull trade.
- Wait for prices to rise above the old pivot high of $31. This provides the most confirmation of an upside surge but offers the worst price.
Of course, if you’re entering multiple options contracts or buying a modest number of shares, you could use all three entry techniques and scale-in. For instance, if you’re looking to purchase 300 shares of stock, perhaps you enter the first 100 shares now. Then, once prices rise above the trendline, you buy another 100 shares. Finally, if we push above the pivot high, you acquire the final 100 shares.
By pyramiding into Palantir stock like this, your position is smallest when you have the least amount of confirmation, yet builds in size as the stock proves itself.
Palantir Stock Options Trade
You can do the same thing with options if you’re using multiple contracts.
At $26, PLTR stock is cheap enough to make naked puts tempting. Its higher implied volatility translates into a handsome payday for those willing to sell premium. Here’s my high probability trade of choice.
The Trade: Sell the January $20 puts for approximately 65 cents.
Consider this a bet that the stock sits above $20 at expiration. If it does, you’ll capture the max gain of $65 per contract. The initial margin required should only be around $300 to $600, so you’re looking at a potential 10% to 20% return for a trade that currently offers an 86% chance of success.
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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