December ushered in a monster breakout for Lyft (NASDAQ:LYFT) stock. And now, it has recaptured all that was lost after the novel coronavirus arrived to wreak havoc on asset prices. To celebrate the round trip, we’re breaking down its price action and suggesting how to profit from the strength.
One of the powerful characteristics of the market is its ability to rapidly re-price stocks. Usher in a global pandemic and BAM! the Street will hack 50%+ off of the price of companies connected to travel. Take the pandemic away through the discovery of a hyper-effective vaccine and BOOM! the crowd will resurrect prices nearly as quickly.
If 2020 has taught us anything it’s that markets move swiftly to new information. If you don’t have a method to spot and respond to these seismic shifts, you’ll be left behind.
LYFT Stock Charts
The beauty of technical analysis or reading price charts is it allows for rapid response. When the price of Lyft stock crashed in February and a downtrend took root, the price chart broadcasted the bearishness to any willing to listen. And then, last month, when the Street’s sentiment turned on a dime, the price chart guided watchers back to the bull camp.
The daily trend is now bullish by any measures. Since bottoming at $21.34 in late-October, LYFT has grown by 125%. It’s a monster gain compressed in a very short time frame and, again, speaks to just how rapidly investors are returning to an area that was utterly abandoned earlier in the year. The rocket-like rise is pulling the 20-day and 50-day moving averages higher. And, it has been powerful enough to even cause the slow-moving 200-day moving average to curl up.
Another telltale sign of Lyft’s muscle-flexing has been the shape of the retracements along the way. Strong trends don’t form deep, long-lasting pullbacks amid heavy profit-taking. Instead, their pauses are brief and shallow. They allow for slight profit-taking and quick digestion of gains. Then bulls quickly return to bid prices back to the moon.
The only two minor pauses we’ve seen since the bottom were brief high bases. The most recent one gave way to the current upswing which has prices making a run for the 2020 high of $54.50. Ultimately, that’s the target for the current phase of the uptrend. Volume patterns added further fuel to my bullish convictions. It is the punctuation of the sentence. High volume days are like exclamation points that add urgency and emphasis to whatever signal price is broadcasting that day.
Volume Patterns and a Trade
Over the past six weeks, we’ve seen a groundswell in high volume up days. Often referred to as accumulation days, these signal institutions or big players wading into the waters in support of buyers. Simultaneously, high volume during down days has disappeared and suggests bears are hibernating.
While I wouldn’t be surprised over another consolidation pattern forming to work through overbought pressures, it will be a buying opportunity. If you’re willing to bet on an eventual retest of the $54.50 peak, then purchasing call spreads offers a compelling return. The implied volatility rank of 10% suggests a long premium play like this is preferable over selling puts or put spreads.
Since February and March options aren’t yet available, I’m going to use the January expiration. It gives the stock 35 days to make the move to $55. It’s an aggressive time frame, but the cost is low so there isn’t that much at risk.
The Trade: Buy the Jan $50/$55 bull call spread for around $1.45.
The risk is limited to the initial cost. The max reward is $3.55.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
For a free trial to the best trading community on the planet and Tyler’s current home, click here!