Industrial stocks have been riding high on reopening hopes and capital shifts to cyclical stocks. The Dow Jones Industrial Average has awoken and now boasts one of the best-looking uptrends of all the major indexes. For those afraid to chase the momentum, however, I have good news. Tuesday’s stock swoon delivered a much-needed pullback to the industrial sector.
Believe it or not, this is the first quality three-bar retracement of 2021. It’s ushered prices of the Industrial Sector ETF (NYSEARCA:XLI) to the doorstep of the rising 20-day moving average, which is the exact spot where the last dip ended.
If, like me, you believe the uptrend is destined to continue, then this is as good an entry point as any.
Though you could buy the sector exchange-traded fund, here are three components that offer compelling setups.
Let’s take a closer look at the price charts and build out an options trade to profit.
Industrial Stocks: Boeing (BA)
The ascent of airline stocks from last year’s disaster is well-known at this point. Boeing has followed the air carriers higher and saw huge capital inflows earlier this month. The volume surge suggests institutions piled in and view BA stock favorably. Pullbacks following breakouts of that magnitude are usually great buying opportunities.
Tuesday pulled prices right into the 20-day moving average and the old resistance pivot from last November. Both metrics suggest this is an area of potential support. If the nearly $250 price tag has you pausing, then use options instead. I have two trade ideas I like here. Use the bull put if you want a high probability cash flow trade. Use the bull call if you want a more aggressive, directional play.
Trade 1: Sell the May $205/$200 bull put for 65 cents.
Trade 2: Buy the May $260/$280 bull call for $5.15.
At last week’s peak, Cummins was up 20% on the year. It’s a rousing start for a stodgy industrial stock and speaks to just how favorable the sector is. To those afraid to chase, this week’s retreat provides a lower-risk entry point. At yesterday’s low, the decline grew to an 8% drop. It’s large enough to qualify as a legitimate buy-the-dip opportunity, but it wasn’t so severe as to reverse the overall trend.
Indeed, we’re still above the rising 50-day moving average and have support levels aplenty looming underneath should sellers continue to press their advantage.
From a cost perspective, CMI stock carries a price tag similar to Boeing. For that reason, options spreads are my preferred path to betting here.
The Trade: Buy the May $270/$280 bull call for $3.
FedEx rounds out today’s hat trick of industrial stocks to buy. The shipping giant entered 2021 on the ropes. Its daily trend was lower, and the 50-day moving average was falling. However, after basing for the first two months of the year, FDX stock has finally begun climbing again. The most important catalyst for its revival is the latest earnings report. Wall Street liked the number and delivered an overnight up gap that drove the stock to a fresh three-month high.
This week’s drop filled the gap zone, providing the first buy-the-dip setup since earnings. If you combine the bullish sentiment on industrials with FedEx’s positive earnings report and fresh uptrend, it creates a strong argument to buy.
The next two upside targets are $283 and $305.
The Trade: Buy the May $280/$290 bull call vertical for $3.25.
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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