To quote our head technical analyst at All Star Charts, Steve Strazza: “Bullish setups are hard to come by these days”, states Sean McLaughlin of AllStarCharts.com.
But, for those willing to venture into the choppy waters, recent market action has provided us with some nearby risk-management levels that give us the opportunity to act quickly if we’re wrong, limiting our losses while giving us multiples of potential profit (as measured against the risk).
And today’s idea comes from the only sector to show YTD gains this year.
What’s not to like about that?
Strazza has a great deep dive into why Coterra Energy (CTRA) looks compelling as a longer-term play in the latest Young Aristocrats report. I encourage you to give it a read here.
For me, and for our trade today, this is the money quote:
"After carving out a rounding bottom formation for almost a decade, the stock finally kicked off an upside resolution last month as prices hit their highest level since 2014."
With the stock market currently pulling back and testing its 2017 highs, we want to be buyers of any weakness back toward the breakout level of this multi-year base. Our risk is very well-defined at these former highs.
As long as we’re above 30.60, we want to be long CTRA with a target of 41.50 over the next two to four months.
Here’s the CTRA chart:
That’s a beautiful base. And if you’re a long-term investor who loves steady dividend payers, this stock should be up for consideration.
However, with options, that is not the game we’re involved in. Our timeframes rarely exceed 12 months out. Often, we’re looking in the three to nine months range for our trade plans to play out. And for today’s play, we’re looking at an even smaller timeframe as I feel this stock is at an important level where it’s either going to break down quickly, or it’s going to bounce back towards the recent highs north of $36 per share—rapidly.
We can enter a bullish bet here that has both defined risk and a nearby risk-management level to act against to limit our losses if we’re wrong. Either way, we should know pretty quickly, and so we’re going to get into a position with July expiration options.
Here’s the Play
I like buying CTRA July (monthly expiration) 35 calls for a 70 cents debit or better. This debit is the absolute most we can lose if we’re wrong.
If $CTRA breaks and closes below $30 per share, that will be our signal to exit the trade. This level is significant because of price memory (as displayed in the above chart) and due to the fact the 50-day moving average of prices for CTVA is rising up to meet the stock in this $30-$31 zone:
So any close below $30 will have me looking to sell my entire position for whatever I can salvage.
Meanwhile, I’ll leave a resting order to sell half of my calls position when they’ve doubled in value. So, if I enter at 70 cents, I’ll be looking to sell half at $1.40. This will leave me with half a position that I’m essentially riding for free because selling half paid me back for the entire position debit that was incurred today.
If $CTRA goes on to break out to new highs—hold on! It might get very interesting!
Learn more about Sean at AllStarCharts.com.
