Today's Trading Plan
So. I bought some C3.ai (NASDAQ: AI) call options right before the close on Friday. Usually, my trading strategy allows for some time for me to let you know what I’m doing…
Like the Bank of America (NYSE: BAC) put options I discussed on Wednesday, February 15. I was anticipating a move lower for the stock market. It took a couple days for that move to get underway, and those BAC put options were available around $0.40-$0.45 for a couple days after I suggested them to you…
And when it came time to sell them, there was plenty of time to get $1.20 for them, as I suggested on Wednesday, February 22.
Now, the stock market does a lot of things well. But keeping a tight schedule is not one of them…
Sometimes it’s already waiting for you at the bar when you arrive for a 7 pm dinner date. Other times, you’re half in the bag when the market finally shows up. And then other times, the market just ghosts you, and you have to Uber home after a couple too many Tito’s while you sat there, waiting for the stupid market to show up…
And she’ll promise you more
Than the Garden of Eden
Then she’ll carelessly cut you
And laugh while you’re bleedin’
But she’ll bring out the best
And the worst you can be
Blame it all on yourself
Cause she’s always a woman to me
I never really thought that Billy Joel was offering up advice to investors and traders, but that’s not bad….
Let’s have a look at Friday’s trading action…
Source: Yahoo Finance
When it became clear to me that a sell-off was imminent, I told you I was looking for two things. First, a drop for the S&P 500 to the 50-day moving average (rising purple line) at 3,979. We got that last week, on Wednesday and Thursday.
I also told you that I thought that, ultimately, the S&P 500 would trade down to the intersection of the 200-day moving average (black line) and the rising trendline (blue line) at 3,940.
On Friday, as the S&P 500 was hitting 3,944, I wrote that: “I’m not piling into any upside trades today on the expectation that stocks will immediately reverse higher. But I will say that a window of opportunity for an upside move is now open.”
As you can see on this chart, the S&P 500 bounced pretty nicely off that 3,940-ish support. And it bounced back to challenge the 50-day moving average. That got me thinking that the market was showing up early for our date, and I didn’t want it waiting at the bar for me…
So I grabbed some call options in the last few minutes of Friday’s session.
As I said earlier, I went with one of the most volatile stocks out there for this trade: C3.ai. I’ve already told you that I like the company’s business model and I think it has tremendous potential.
But I also got a nice looking set up to make a powerful move over the next few days. For one, it reports earnings this Thursday, after the closing bell. C3.ai has beaten earnings estimates in each of the last 4 quarters. So I expect there should be some enthusiasm among traders that another earnings beat is coming…
Then there’s the chart…
Source: Yahoo Finance
I added the purple lines to highlight the recent action. The stock has found support on the rising purple line, and shows a series of higher lows. That’s good. The stock has also been hitting resistance at the descending trendline, showing a series of lower highs.
That series of lower highs might sound like a negative, but what it really means is that resistance is falling. And in fact, the stock price is getting squeezed into the point where the rising and descending lines intersect. The point here is that when the stock price breaks out of this formation (called a “triangle” or “pennant”) it is very likely to make a powerful move.
And I’m betting that C3.ai’s earnings history and general bullishness on AI stocks will lead to a break higher.
I went with the $29 strike price calls that expire this Friday at $0.35. This might sound like an aggressive trade, and it is. The thing is, I don’t want to risk a lot of money on this stock, because it is quite volatile. But I also know that it could easily put in a $3 or $4 move over the next couple days, and a $4 move would give me a ~130% win.
C3.ai’s market cap is only $2.5 billion. It did $269 million in revenue over the last 12 months and has net $800 million in cash. In other words, the valuation is not extreme at all, which is maybe a bit surprising given the attention it and other AI stocks have received lately…
So, while I’m going with an option trade here, simply buying shares at current levels is a good idea too…
That’s it for me today, take care and I’ll talk to you on Wednesday…
Chief Investment Strategist
Pro Trader Today