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 Virgin Galactic Holdings Inc. (NYSE: SPCE), the British-American spaceflight company that operates in the United States. The company develops commercial spacecraft and aims to provide suborbital spaceflights to space tourists.
Why is SPCE trending?
Virgin Galactic Holdings Inc. has been trending recently because of the news of its space-tourism flight. On Sunday, Virgin’s founder Richard Branson and five crewmates flew to suborbital space on the company’s VSS Unity rocket-powered spaceplane in a live-streamed flight, bringing Astro-tourism a step closer to reality.
Basking on the success of the flight to the edge of space, SPCE had made significant gains. Virgin Galactic also announced more than 600 reservations from would-be space tourists, with tickets initially costing $250,000 apiece after the successful flight. Virgin Galactic plans to begin passenger launches in 2022 after a series of final test flights in 2021.
However, the shares of SPCE had declined recently when news broke that the company has filed to sell up to $500 million worth of shares, according to a regulatory filing Monday. As most investors do not prefer to see their positions diluted, it triggered a selling spree. The stock’s downmove may also have been caused be due to the old Wall Street adage: “Buy the rumor, sell the news”, implying that the market always looks ahead and will discount tomorrow’s news today.
It may also be noted that Virgin Galactic has some heavy-weight competitors, including Jeff Bezos’ Blue Origin, and Elon Musk’s SpaceX.
Bezos’ flight is set for July 20, marking the 52nd anniversary of the Apollo 11 moon landing. Like Virgin Galactic, Blue Origin’s first vehicle, New Shepard, is designed to take people on short suborbital trips providing about four minutes of weightlessness.
SpaceX’s first private flight is set for September, wherein the company aims to take tourists on more than just brief, up-and-down trips. Customers will instead go into orbit around the Earth for days, with seats costing well into the millions.
With so many contributing factors to take into consideration, here’s how to trade SPCE right now based on its charts.
SPCE Chart
On analysis, there are multiple bullish indications on the weekly chart of SPCE.
SPCE – Weekly Chart
#1 Price Above MA: The stock is currently above the 50-week SMA, indicating that the bulls are presently in control.
#2 Bullish RSI: The RSI has currently moved above 50 after reaching oversold levels.
#3 Bullish MACD: The weekly chart shows that the MACD line (blue color) is above the MACD Signal line (orange color), which is a possible bullish indication.
#4 Bullish ADX and DI: The ADX line has started to move up from below –DI and +DI lines. The +DI line and the ADX lines are also currently above the –DI line. This indicates possible bullishness.
Recommended Bullish Trade (based on the chart)
Buy Levels: If you want to get in on this trade, the buy level for SPCE is in two scenarios. These are marked as green color dotted lines in the weekly chart.
- Buy Level #1: You can purchase the shares of SPCE if it trades above the price of $57.50.
- Buy Level #2: You can purchase the shares of SPCE if it corrects to the previous support level, which translates to a price of $34.00.
Important Note: Make sure that you only enter the trade once the weekly close is above the recommended price level.
TP: Our target prices for various buy levels are as follows
- The target price for Buy Level #1 ($57.50) is $70 in the next 3 to 6 months.
- The target prices for Buy Level #2 ($34.00) are $57 and $70 in the next 3 to 6 months.
SL: To limit risk, place a stop loss at the following levels.
- The stop loss for Buy Level #1 ($57.50) is $49.50.
- The stop loss for Buy Level #2 ($34.00) is $26.00.
Note that the stop loss is on a closing basis.
Target Upside: Our target potential upside is 21% to 106% in the next 3-6 months.
- Entry at Buy Level #1 ($57.50): For a risk of $8.00, our target reward is $12.50. This is a nearly 1:2 risk-reward trade.
- Entry at Buy Level #2 ($34.00): For a risk of $8.00, our first target reward is $23.00 and the second target reward is $36.00. This is a nearly 1:5 and 1:7 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 near-term support level with high volume. The sell-off of the stock could also be triggered in case of any negative news, poor earnings, issues with the vaccine, 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 near-term support level with a very high volume, it could point to an upcoming short-term correction. In that case, below are the entry levels, stop loss levels, and target prices.
Sell Level: You can take short positions on SPCE if the stock breaks down below the price of $32.00. This level is marked as a red color dotted line in the chart.
Important Note: Make sure that you only enter the trade once the weekly close is below the recommended price level.
TP: Our target prices are $25 and $20 in the next 3-6 months.
SL: To limit risk, place a stop loss at $36.00. Note that this stop loss is on a closing basis.
Our target potential downside is 22% to 38% in the next 3-6 months.
For a risk of $4.00, our target rewards are $7.00 and $12.00. This is a nearly 1:2 and 1:3 risk-reward trade. In other words, this trade offers nearly 2x to 3x rewards compared to the risks.
Risks to Consider: The stock may reverse its overall trend if it breaks upwards from the support areas 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