Stocks got slippery this week, especially in the land of small caps. The little guys were down nearly 5% from their peak at Thursday’s low. Fortunately, Treasury Secretary Janet Yellen rode to the rescue in a CNBC interview to make a case for more stimulus. The reminder that more “stimmy” checks are on their way gave buyers fresh courage. If you think the strength has legs, today’s group of pullback stocks to buy is worth a look.
There is no shortage of sweet-looking uptrends to buy. The key is to focus on those that offer lower-risk entries. Rather than chasing high fliers in the stratosphere, smart traders wait for pullbacks to provide better entry points. Multi-day retracements allow profit-taking to work through the system and ultimately create more sustainable trends.
My preferred dips to buy are those that transpire in stocks whose uptrends just saw increasing momentum. All three of today’s candidates check that particular box. Here they are:
Let’s take a closer look at each chart and discuss which options strategy might be best to capitalize.
Perfect Pullback Stocks to Buy: DraftKings (DKNG)
After consolidating for the prior two months, DraftKings stock took flight on Feb. 2 following news that Cathie Woods’ ARK Next Generation Internet fund added DKNG to its holdings. The jump sparked a run to new highs in the stock amid increasing momentum. I have good news for traders who missed the move. Prices have returned to the breakout area.
Indeed, the past two weeks of selling pulled DKNG down to its rising 20-day moving average and old resistance at $56. And, like clockwork, buyers swarmed to defend the previous ceiling. With Thursday’s reversal candle confirming it’s now a new support zone, now is as good as time as any to deploy bullish trades.
A simple bull call spread offers an attractive payout if prices can return to the pivot high.
The Trade: Buy the April $60/$65 call vertical for $1.95.
Disney shares were red-hot ahead of last week’s earnings report. Given the sharp increase, traders quickly rang the register after the announcement failed to warrant additional upside. I’d chalk up the entire episode as a classic example of buy-the-rumor-sell-the-news. Mickey Mouse fans needn’t worry, though. The pullback was well-deserved, much-needed and otherwise healthy.
After the early February run-up, DIS stock wasn’t exactly offering an attractive entry point anyways. Prices could fall further toward the 20-day moving average, but they are currently December’s pivot high. Like DKNG, there’s a chance this old ceiling becomes a new floor. For that reason, I think it’s worth building out trade ideas in case bulls are quick to pounce.
I suggest waiting for a break of the previous day’s high to confirm the rebound is beginning. To elevate our odds of success, I like using bull put spreads.
The Trade: Sell the March $170/$165 bull put for 65 cents.
Russell 2000 ETF (IWM)
We’re ending our stocks to buy article with the most obvious choice of them all — small caps. Since the Russell 2000 ETF has arguably the cleanest pullback of everything heading into Friday’s session, why not buy it directly? Ever since the Pfizer (NYSE:PFE) vaccine kicked off this epic bull run last November, every single dip has been a gift that quickly delivered profits. I see no reason why we shouldn’t expect the same from the current pattern.
IWM’s last advance saw powerful momentum, suggesting the uptrend still has gas in the tank. We kissed the rising 20-day moving average yesterday and are already jumping off it in early morning trading Friday. Since it’s already triggered, you have a green light for new plays.
The Trade: Buy the March $225/$230 bull call for $2.40.
On the date of publication, Tyler Craig held LONG positions in IWM.
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