The implosion in Churchill Capital IV (NYSE:CCIV) has matched the speed of the ascent that preceded it. Support levels have caved just as resistance zones melted during its fiery flight. With prices now returning to a seemingly more sane level, many a spectator may be wondering if now is the time to take a bite of CCIV stock.
If you’re following the price action and the best technical analysis practices, then the answer is a resounding no. Its current behavior isn’t yet providing a tailwind for bottom fishers.
Down below, I’ll share what we’d need to see for buyers to have a more favorable environment.
The other variable is strategy selection. If you’re willing to use options contracts in building your bet, then I think casting a line here does have some appeal.
I’ll share the details below.
CCIV Stock Chart
The symmetry in CCIV’s rise and fall is a thing of beauty. Veteran traders know when prices go parabolic, the inevitable retracement can be swift. Because of the speed of the climb, very few support zones were established along the way. As a result, prices had very few potential support zones to slow the sell-off on the way back down. We sliced through both the 20-day and 50-day moving averages, sending red flags flying. Throw it all together, and I can think of two key reasons why bullish trades down here remain suspect.
First, despite Tuesday morning’s rally, we’re still below the 50-day moving average. I think of this line in the sand as a railroad track running through a city. Law-abiding, well-to-do citizens, live on the north side. It’s a pleasant place with kids playing in the Streets and good neighbors. Unfortunately, the same can’t be said when you travel south of the tracks. Crime is rampant, and murders are commonplace. It’s sketchy.
CCIV slipped south of the tracks last week and has yet to return. And it remains to be seen how long it will stay there. It could be a week; it could be a month. All I know is that bull trades are suspect until we return to the topside of this key indicator.
Set an alert for when prices rise above $25.50. I’ll feel much more comfortable about bullish directional trades when we climb above it.
Forsake Direction, Embrace Cash Flow
While betting on a resurgence has low odds at this point, I could be convinced of a cash flow trade like selling puts. The appeal is simple.
First, CCIV stock is hovering near $20, making the margin requirement (aka collateral) for a naked put low. That translates into a high return on investment.
Second, unless you think prices will retrace 100% of their ascent by returning to $10, buyers should emerge at some point between here and there to create a tradable bottoming in the stock.
The beauty of selling puts is it creates a wide profit range. CCIV stock price can rise, stagnate, or fall (just not too far!) from its current level – and you still win. There’s also the added benefit of potentially buying shares at a steep discount if assigned.
The Trade: Sell the April $17.50 put for around $1.00.
If you want to wait for confirmation, consider using a break of a prior day’s high to signal the current downswing found a bottom. The price is working on its sixth day in a row with a lower high.
Your max gain is $1 per contract and will be captured if the stock sits above $17.50 at expiration. If it’s below that level, you will be obligated to buy 100 shares at a cost basis of $16.50.
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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