Remember when money was flooding from growth stocks and the tech sector searching for greener pastures in cyclical and small caps? Well, the flow has reversed in recent days, and that could bode well for Pinterest (NYSE:PINS). PINS stock followed the Nasdaq into the abyss in early March, and it’s been trying to find its footing ever since.
Today we’re going to nail down what chart watchers need to see before piling back in. Here’s the short version. The Nasdaq is forming a potential inverse head-and-shoulders pattern that signals the bottom could be in. If bulls can press their advantage and break the pattern’s neckline, then the future looks bright for growth stocks in general and Pinterest in particular.
PINS stock has a resistance zone of its own to wrestle with, but I suspect it will break alongside the Nasdaq’s upside reversal.
A Bottom is Forming in Tech
From peak to trough, the Invesco QQQ Trust (NASDAQ:QQQ) fell 12%. The damage was significant enough to turn the daily trend lower and breach the 50-day moving average, but it stopped short of reversing the weekly uptrend.
The reaction off the lows has been very constructive. For starters, we rebounded all the way back to the previous pivot high. Normal downtrends form lower pivot highs, not equal ones. It takes strength to soak up supply and retest an old resistance zone.
And then, there’s the higher pivot low that just formed with Monday’s robust rally. We’re now once again testing the 50-day moving average and within striking distance of the $324 ceiling, which acts as the neckline for the entire head-and-shoulders setup. Buyers still have their work cut out for them, but you can’t deny that QQQ’s price chart now looks far more constructive than it did just two weeks ago.
PINS Stock Chart
It is against this improving backdrop for the growth area of the market that you should analyze Pinterest’s price action. The weekly trend is absolutely incredible.
The pandemic was undoubtedly a boon for the company. Its share price has exploded from $10 to nearly $90 in a single year. With so many gains under its belt, it’s no wonder prices are starting to settle. A lot of future earnings have been pulled forward, and it’s healthy for PINS to pause.
Though the recent 33% plunge was harrowing, it still didn’t reverse the longer-term uptrend. The past three weeks have stabilized near the rising 20-day moving average. There are multiple touchpoints of $76 over the past six months, making it the level that needs to be breached before the upward march resumes.
A second reason for the significance surrounding $76 is the 50-day moving average which sits nearby. It’s where the last rally went to die and needs to be taken out before buyers gain the upper hand. Those itching to purchase PINS stock should exercise patience. Let others do the hard work by clearing out the sellers. Then pounce when the coast is clear.
A close above $76 should pave the way for a return back to the $90 peak.
Bull call spreads are my play of choice once the ceiling gives way. The lower implied volatility makes it a lower-cost bet. Buying the June $75/$85 bull call spread should do the trick. It currently costs $3 but will rise to around $4 by the time the stock triggers. At that point, you’ll be risking $4 to make $6, which is a potential 150% return on investment.
On the date of publication, Tyler Craig held LONG positions in FB and LOW.
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