Don’t let the S&P 500‘s resilience fool you into thinking bears are still in hibernation. They’ve been ravaging momentum stocks for more than a month, causing many to fall 20% to 40% from their peaks. Pessimists will say the bull market in these areas is dead, but I don’t buy it.
If anything, this is creating some juicy opportunities to scoop up hot stocks at a steep discount.
We still need additional evidence that buyers are returning, but Tuesday’s trading session saw the first signs of strength returning in many of the names I’m following. I scoured industries from solar and cannabis to retail and fintech. The following three symbols have all the characteristics of momentum stocks, and their charts are finally showing signs of strength.
After taking a closer look at their bottoming attempts, I’ll unveil my favorite options trade idea.
Momentum Stocks to Buy: Canadian Solar (CSIQ)
Solar stocks entered 2021 on fire. Their growth potential, high betas and powerful uptrends make them obvious targets for the momentum crowd. February’s fallout saw Canadian Solar slide nearly 50% from its high. It erased not only the year-to-date gains but also the fourth quarter’s. The 200-day moving average swooped in to provide support, and we’ve since seen a bottoming formation develop.
Importantly, first-quarter earnings have come and gone without tanking the stock price any further, so it appears the selling pressure is exhausted. The past two weeks have seen multiple accumulation days crop up, hinting at buyers’ return. A break above $50 should complete and confirm the bottoming pattern. Based on Tuesday’s rally, a breach looks imminent.
Implied volatility is running hot at the 43rd percentile, so short premium plays are attractive right now.
The Trade: Sell the May $40/$35 bull put for 75 cents.
ARK Innovation ETF (ARKK)
If you’re seeking a more diversified route for gaming momentum, then look no further than the hyper-popular ARK Innovation ETF. At its peak in February, the red-hot fund had gained 400% from last year’s low. The subsequent rug-pull wasn’t pretty, though. Sellers cut the fund by one-third in three weeks, reminding shareholders anew that momentum cuts both ways.
Those watching for a bottom finally have something to cling to. This week saw a retest of the $108 support zone. The 200-day moving average is also entering the picture as a big potential floor. While work remains before fully turning the trend higher, I’m encouraged by Tuesday’s rally and this morning’s follow-through.
At the 52nd percentile, implied volatility for ARKK stock options is pumped. Like CSIQ, I’m going with a bull put spread idea.
The Trade: Sell the May $100/$95 bull put for 75 cents.
Macy’s rounds out today’s momentum stocks to buy with a tempting bull retracement pattern. Retail stocks have been all the rage since last November. Speculators and bargain hunters have created multiple parabolic runs in M stock since then. The most recent one came full circle back to its starting point, which gives us a much more palatable entry. The 50-day moving average is acting as support, and volatility has receded in recent days.
The next trade trigger is a break over the 20-day moving average. It will signal the past week of consolidation is ending, and a new advance is beginning. The general level of high implied volatility works nicely with the stock’s low price tag to make naked puts a smart play.
The Trade: Sell the May $14 put for 70 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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