It is no secret that stocks are prone to sudden moves in either direction. This could be triggered by economic data, geopolitical events, stock-specific news, or market sentiment.
Trading such volatile stocks are usually considered a high-risk-high-reward venture. Many traders opt to stay out of the trade rather than risk a loss. However, careful analysis of the charts could help you to enter at the right levels, thereby limiting risk to an extent.
With this in mind, we have started a new weekly series on the trending stock of the week —stocks that are featured heavily in the news.
This week’s stock pick is Clover Health Investments Corp (NASDAQ: CLOV), the company that operates as a Medicare Advantage insurer in the United States, mostly for the Southern states, including South Carolina, Tennessee, and Texas. Clover Health went public on Jan. 8 by merging with a special-purpose acquisition company, or SPAC, run by venture capitalist Chamath Palihapitiya.
Why is CLOV trending?
Clover Health has been in the spotlight recently, thanks to the meme stock rally. CLOV was among the latest stocks picked by frenzied Reddit traders sparking a short squeeze. This had resulted in a massive 200% surge in its price last week.
The company had also posted encouraging 2020 results in March, wherein the total revenue grew 46% year-on-year. CLOV had reported solid figures for the first quarter of fiscal 2021, with revenue of $200.3 million, beating estimates.
The company’s Medicare Advantage insurance membership was up 18% from a year ago, and its new traditional Medicare insurance product is expected to have 70,000 to 100,000 members by the end of 2021. As a result, full-year revenue is anticipated to be $810 million to $830 million, up 22% from 2020’s results at the midpoint of guidance. The company also reported over $720 million in cash and equivalents and no debt on its books at the end of March.
On the flip side, CLOV had moved lower recently due to the news of Bank of America downgrading the stock from “neutral” to “underperform” (i.e., sell), assigning a $10 price target over the next 12 months. This is a nearly ~32% downside from the last close of $14.66. In addition, there is also the inherent risk associated with meme stocks. Such stocks are susceptible to major falls if the push from Redditors loses steam, or if the retail investors on Reddit set their sights on other targets.
Here’s how to trade CLOV right now.
CLOV Chart
On analysis of the daily chart of CLOV, there seems to be various bullish indications for the stock.
#1 Price above MAs: The stock’s price is currently above both 50-day as well as 200-day SMA. This indicates that the bulls are currently in control.
#2 Bullish Aroon: The value of Aroon Up (orange line) is above 70 while Aroon Down (blue line) is below 30. This indicates bullishness.
#3 MACD above Signal Line: The daily chart shows that the MACD line (blue color) is above the MACD signal line (orange color). This is a possible bullish setup.
#4 Bullish ADX and DI: The ADX indicator shows bullishness because (+DI) is greater than (-DI) and the ADX line is currently moving higher from below (-DI) and (+DI) lines.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for CLOV is in two scenarios. These are marked as green color dotted lines in the daily chart.
- Buy Level #1: You can purchase the shares of CLOV if it corrects to gap support level of the breakaway gap, which translates to a price of $12.00.
- Buy Level #2: You can purchase the shares of CLOV if it closes above the gap resistance level of the breakaway gap, which translates to a price of $16.80.
Important Note: Make sure that you only enter the trade once the daily close is above the recommended price level.
TP: Our target prices are $20 and $27 in the next 3 to 6 months for Buy Level #1 (12.00) and Buy Level #2 ($16.80).
SL: To limit risk, place a stop loss at the following levels.
- The stop loss for Buy Level #1 (12.00) is $9.70.
- The stop loss for Buy Level #2 ($16.80) is $14.70.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 19% to 125% in the next 3-6 months.
- Entry at Buy Level #1(12.00): For a risk of $2.30, our first target reward is $8.00 and the second target reward is $15.00. This is a nearly 1:4 and 1:7 risk-reward trade.
- Entry at Buy Level #2 ($16.80): For a risk of $2.10, our first target reward is $3.20 and the second target reward is $10.20. This is a nearly 1:2 and 1:5 risk-reward trade.
In other words, this trade offers 2x to 7x more potential upside than downside.
Risks to Consider: The stock may reverse its overall trend if it breaks down from the support level of the breakaway gap with high volume. The sell-off of the stock could also be triggered in case of any negative news, overall weakness in the market, or any regulatory changes in the sector.
Recommended Bearish Trade (based on the chart)
In case the stock breaks down from the support level of the breakaway gap and closes below it, an upcoming short-term correction may be imminent. In that case, below are the entry level, stop loss level, and target price.
Sell Level: You can take short positions on CLOV below the price of around $11.90. This sell level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the daily close is below the recommended price level.
TP: Our target price is $7 in the next 3-6 months.
SL: To limit risk, place a stop loss at $14.30. Note that this stop loss is on a closing basis.
Our target potential downside is 41% in the next 3-6 months. For a risk of $2.40, our target reward is $4.90. This is a nearly 1:2 risk-reward trade. In other words, this trade offers nearly 2x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards from the gap support level with high volume. The breakout of the stock could be triggered in case of any positive news, overall strength in the market, or any regulatory changes in its sector.
Happy Trading!
— Trades of the Day Research Team
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