Last month’s earnings report flipped a switch for Palantir (NYSE:PLTR) stock. Prices were limping into the event, having fallen nearly 60% from their peak. Shareholders were desperate for a positive catalyst to stem the decline. And the market gods saw fit to toss them a lifeline. The sales numbers were good enough to bring buyers swarming, and PLTR stock has been marching higher ever since.
Now, after a month-long climb, Palantir is testing some key overhead resistance zones.
Supply has entered the market, and we’ve got a bit of a fight on our hands here. The resolution of the statement will signal the stock’s next directional move. If you want to take advantage of it, read on. I’ll have a trade idea below.
To better understand Palantir’s return to up-trending status, it’s worth noting the broader recovery we’ve seen in growth stocks. Let’s take a closer look at the Nasdaq using the Invesco QQQ Trust (NASDAQ:QQQ).
Growth Stocks Awake
There’s no denying the rebound in PLTR was aided by optimism’s return to growth stocks. While there are multiple exchange-traded funds (ETFs) we could use to represent both the momentum trade, I like using QQQ because of its popularity. Simply put, buying growth stocks or other momentum-based trades like PLTR has a tailwind when the Nasdaq is in an uptrend.
The downdraft that was pulling QQQ lower ended mid-May with a textbook double bottom pattern. On May 20, the reversal formation completed with a breakout bar that simultaneously lifted prices back above the 50-day moving average. The Nasdaq has toed the bullish line ever since, finally bursting to a fresh record yesterday.
While the Fed meeting always runs the risk of upsetting the market mood, I think the Nasdaq’s push to new heights bodes well for stocks like PLTR.
PLTR Stock Chart
Palantir has yet to reach its first birthday as a public company. As such, there’s no need to fiddle with the weekly time frame. The daily chart finds itself trending higher for the first time since February. Prices are carving out higher pivot highs and lows above both a rising 20-day and 50-day moving average.
On the momentum front, the pace is slowing a bit. It could be a matter of the calendar and the summer doldrums, which seem to have taken hold of the entire stock market. Or, it could be a matter of the $25 resistance zone we’re now wrestling with.
Regardless of the culprit, the rate of increase has slowed.
Smarter Plays for Bulls
Rather than buying in the face of stiff resistance, the smarter play for bulls is to wait for a push above the $25.60 level. It will signal there’s enough strength to power Palantir for the next leg higher.
From a strategy perspective, I’m finding cash-flow plays like naked puts tricky. On the one hand, implied volatility is extremely low, and put premiums have shrunk accordingly. On the other hand, the slow-moving market makes it challenging to like directional trades.
If I had to play PLTR here, I’d consider the following:
The Trade: Sell the July $22 put for 52 cents.
If PLTR sits above $22 at expiration, you’ll capture the max gain of $52. The initial margin requirement is only around $220, so the return on investment is more than 20%. The put delta is 20, so you can be pleased that the trade carries a nice 80% probability of profit.
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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