How to Trade Carnival After its Post-Earnings Plunge

The reopening trade in some quarters of the market is struggling. Chalk it up to reality failing to meet the lofty expectations that got priced in during the past year’s bonanza. Carnival (NYSE:CCL) is the latest company to struggle after a disappointing earnings report this month. While I wouldn’t call a CCL stock recovery dead just yet, it certainly isn’t healthy.

Carnival cruise (CCL) ship on the water
Source: Ruth Peterkin / Shutterstock.com

Prices fell to a new six-week low on Tuesday, even as the Russell 2000 remains nestled near a record high. After getting destroyed last year, Carnival became a small-cap company, which makes the Russell a more representative index than the S&P 500.

From peak to trough, CCL has now declined 18%. The relative weakness provides little reason for bulls to stay and shop. Price is submerged beneath the 50-day moving average but arguably isn’t yet oversold enough to tempt bargain hunters to take a bite.

It’s interesting to note that other cruise line companies like Royal Caribbean (NYSE:RCL) are also struggling to make headway, as are casinos and airlines. Taken together, the rollover in these three industries illustrates that investors aren’t just displeased with CCL. Its weakness is a symptom of a broader falling out between investors and reopening-based trades. For one reason or another, the Street has been rotating capital out of these themes and into growth names.

Carnival (CCL) stock chart with major support at $24
Source: The thinkorswim® platform from TD Ameritrade

Look no further than the Ark Innovation ETF (NYSEARCA:ARKK) if you want to see where the money has been flowing this month.

The Bull Case for CCL stock

Given the tone of my intro, you’d be forgiven for believing I was going to stick with the shorts. But, there is a bull case to be made for CCL, despite its ongoing tumble.

For starters, CCL stock has suffered multiple pullbacks over the past eight months, some of which mirror the magnitude of the current one. And yet, buyers eventually merged to push prices to new heights. It’s too soon to rule out a similar outcome for this one.

A second factor weighing in favor of an eventual bull play is the support zone that looms close at $24. Its significance is best seen on a weekly chart. Note how the principle of polarity has been in play. Throughout 2020, $24 was a graveyard in the sky where rallies went to die. However, this year the script has flipped. The old ceiling is now a new floor and a significant one at that.

Carnival (CCL) weekly stock chart with $24 support
Source: The thinkorswim® platform from TD Ameritrade

Because we’re closing in on it once again, the risk versus reward doesn’t favor a bear trade. If you want to bet on Carnival’s continued demise, then it’s best to wait for a confirmed break of $24 before piling in. Sure, you’ll be entering at lower prices, but you’ll also have some serious confirmation that the weekly trend has officially reversed.

The Next Move

In light of the bullish case, I’m open to preparing a long-leaning options trade to bank on support once again holding. If prices can descend for another few sessions to set up even more aggressively oversold conditions, then all the better.

The implied volatility is high enough to make selling premium interesting. The high probability of shorting out-of-the-money puts will also allow plenty of room for CCL stock to flounder while still producing a profit.

For now, the August $22.50 puts are the most interesting strike on the board. You can sell them for around 60 cents if you’re willing to wager we can stay above it for the next month. I suggest waiting for CCL to pivot and push above a prior day’s high first.

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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