General Electric (NYSE:GE) has some serious fundamental baggage it’s carrying around, but you’d have to be blind to miss the beauty of its price trend right now — especially after last Thursday’s super spike. Buyers rushed in to jam prices higher by 7%. Volume patterns for GE stock validated the strength, with nearly 200 million shares changing hands on the session.
Today we’re going to take a closer look at the improving technical posture and build a few options trade ideas to capitalize. Along the way, we’ll spotlight a few of the narratives bringing buyers to the yard, starting with the strength of its sector — industrials.
Industrials Are Hot
All sectors are climbing due to the bullish tailwind boosting equity prices. But some are rising further than others, creating pockets of relative strength. So-called “cyclical” sectors, in particular, have been benefiting from huge capital inflows due to their greater sensitivity to the business cycle and history of leading when economic growth and inflation expectations are heating up.
Consider the following chart of the Industrial Sector (NYSEACRA:XLI), for instance.
XLI is up 19% in 2021. By comparison, the S&P 500 is only up 12%. The outperformance is in place and obvious. Rather than speculating on when it will end, the easier (and smarter!) play is to go with the flow. XLI sits a whisker away from a new record with the recent rally and is above all major moving averages.
The sector strength gives us all the excuse needed to favor industrial-based stocks like GE over those in lagging sectors.
The GE Stock Chart
Of course, not all industrials are created equal. Some look better than the rest. Fortunately for GE, it’s fresh off a monster breakout bar that jammed prices close to a 52-week high ahead of the holiday weekend. News fueled the rally, but I’m honestly not interested in the details. As always, the reaction tells you everything you need to know.
For the past two-plus months, GE stock has been stuck in a consolidation pattern between $12.25 and $13.75. The bout of digestion was well deserved after prices nearly tripled in the preceding six months. Breakouts from bases like this have a history of sparking new, sustainable advances. I much prefer these to breakouts in overbought stocks.
As mentioned in the lead-in, volume patterns echo investors’ enthusiasm and give me more confidence that the push will have staying power. Old resistance near $13.75 should now act as a support zone if prices retreat from here.
Enhance Stock Ownership with Calls
The cheaper price tag of General Electric shares makes strategy selection relatively easy. Interested buyers have three choices: long stock, covered calls, or short puts. As one who is always willing to limit the upside in exchange for increasing the probability of profit, I’m partial to the covered call and naked put route. And, since these two strategies can be equivalent positions that offer the same potential payouts, I’m indifferent as to which one a trader might use.
I’ll illustrate a covered call play below. The appeal to selling calls against the stock is you pick up some protection and cash flow while enhancing your probability of profit.
The Trade: Buy GE stock and sell the July $15 call.
You’ll want to sell one call option for every 100 shares purchased. At the time of this writing, you could buy GE for around $14.10 and sell the July $15 call for 30 cents.
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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