Carnival (NYSE:CCL) is a buy right here, right now. So says the price chart and the sentiment surrounding reopening plays. In case you missed it, there was a not-so-subtle shift last week in areas most affected by the pandemic. Buyers swarmed to finally put a bottom in casinos, cruise lines and airline companies. CCL stock got caught up in the reversal and looks primed for more upside.
Buyers’ return was much-needed after the drubbing these areas suffered throughout the summer. The Covid-19 delta variant took a toll on the lot of them.
For its part, Carnival sank nearly 40% in just over a month, giving back the lion’s share of its gains after the Pfizer (NYSE:PFE) vaccine first boosted its shares last November. More on that below.
But first, I want to explore what seems to be the catalyst for the bottom – earnings.
Earnings Bring all the Bulls to the Yard
If I had to pin the turn in sentiment on a single day, it would be last Thursday, Aug 8. Multiple companies in the heart of the reopening industries stepped up to the earnings plate and delivered solid enough numbers to bring buyers running.
Volume ballooned alongside price to validate the significance and staying power of the reversal candle. This wasn’t some retail-driven affair but an institutional campaign with deep pockets. As such, I think it has staying power, and the path of least resistance has officially shifted from down to up.
While I think you can find plenty of bullish opportunities, particularly with high probability cash flow options trades like covered calls and naked puts, it is Carnival that most demands our attention.
CCL Stock Chart
Let’s start with the weekly time frame to grasp the bigger picture. The six-week decline that ended a month ago was significant. As mentioned in the lead-in, CCL lost 40% of its value. Along the way, prices breached the 20-week and 50-week moving averages, destroying the healthy long-term uptrend.
Fortunately, bargain hunters finally emerged at the long-term support zone near $20. This area has proven significant over the past 18 months, hosting many reversals. I don’t think it’s a coincidence that this is where buyers finally put in a bottom.
Price has stabilized over the past month, and we’re now trying to break the high of the past three weeks to move the recovery into its next phase.
On the daily chart, the bottoming attempt has taken on the form of an ascending triangle. Last week’s higher pivot low came courtesy of Thursday’s power rally across all reopening industries. I’m particularly encouraged by Monday’s selloff that was quickly bought up. This signals dip buyers are still active.
The next milestone will be rising above the 200-day moving average. Cautious traders might wait for that as further confirmation. That said, I think there’s enough bullish evidence to warrant a trade now.
Short Puts for a High Probability Payout
Continued uncertainty surrounding the fate of cruise line stocks is keeping options premiums pumped. This works to the advantage of selling naked puts in CCL stock.
The Trade: Sell the September $20 puts for 43 cents.
Consider it a bet that prices remain above $20 for the next month. If they don’t, you will be obligated to buy shares at a cost basis of $19.57, which may not be a bad entry point if you still like Carnival’s long-term prospects.