Carnival (NYSE:CCL) is popping 3% today as it rallies for the fourth session in a row. The gains have been impressive, and neutrality has been restored to its overall price chart. Previously, CCL stock was on the verge of breaching significant support and reversing its daily uptrend.
Other cruise line stocks have echoed the climb – and airlines, for that matter. It signals the market isn’t ready yet to give up on the ongoing reopening trade in the industries hit hardest by the global pandemic.
Zooming out from the last week’s performance shows Carnival is stuck in an overall trading range. The sideways movement is well into its third month and has allowed the stock to digest its gains and build a base for the next leg higher.
Additional consolidation wouldn’t be a bad thing either.
The more time that passes, the closer we get to a normal economy and a return to cruising for vacation-deprived consumers. That, in turn, will get CCL back to churning out quarterly profits instead of burning through mountains of cash.
However, given the forward-looking nature of markets, you’ll likely be late to the party if you wait for earnings to look fantastic before piling in. As always, I suggest letting the chart be your guide.
To that end, let’s take a closer look at the weekly and daily time frames.
CCL Stock Charts
Since last March’s bottom, we’ve come a long way, but we have a long way to go before regaining what was lost.
To state the obvious, the pandemic is having a much longer-lasting effect on the cruise line industry. And you can see it reflected in the share price. Despite rising 264% off the lows, at $28.43, CCL stock remains 61% off its 2018 peak.
On a bright note, its weekly trend is healthy. The past few months of chop have allowed the rising 20-week moving average to play catch-up. It acted as support during last week’s downturn, thus preventing a more significant correction. The next tradable entry point on the bigger picture is a high base breakout over $30. Pushing above it would signal the next phase of the recovery is upon us.
The duration of the trading range has turned both the 20-day and 50-day moving averages sideways. With the stock ping-ponging between $24 and $30, it’s tough to have a strong directional opinion until we break in one direction or the other. For that reason, I’d favor cash flow options strategies like covered calls and naked puts over aggressive directional trades.
Besides, chasing new longs after four up days into overhead resistance doesn’t sound like a smart idea.
Embrace the Range with Covered Calls
One of the many advantages of trading options on a stock is they allow you to profit from neutrality. This is due to a concept known as time decay. By selling options against a stock you own (in the case of a covered call) or don’t own (in the case of a naked put), you can profit as time passes and the option value decays toward zero.
If you think an upside breakout in CCL is in the offing, but want to get paid while waiting for it to transpire, then consider buying shares and selling a call option.
Covered Call Play: Buy the stock around $28 and sell the June $30 call for $1.10.
Your cost basis is $26.90, and your max gain is $3.10 if the stock sits above $30 at expiration. If the stock treads water, then you can still pocket the $1.10 of call premium.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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