Call it the ABCs of trading.
As stocks have stabilized after August’s volatile rout, Google parent Alphabet’s chart has formed a consolidation pattern, a series of higher lows and lower highs in the stock that tend to reflect uncertainty or indecision among investors, said Todd Gordon, founder of TradingAnalysis.com.
Many traders take that pattern as a sign that a given stock will soon break out of its ever-tightening range — that either the buyers driving it higher or the sellers keeping a lid on its gains will “win out,” Gordon said Thursday on CNBC’s “Trading Nation.”
Alphabet’s newfound range is likely tied to investors’ broader rotation out of high-performance areas of the market like the technology and consumer discretionary sectors and into value plays like energy stocks. But those moves don’t necessarily spell trouble for the Google and YouTube parent, Gordon said.
“I do see Google moving up and out of this consolidation through [$]1,275,” he said. Alphabet Class A shares were trading around the $1,233 level early in Friday’s session, down less than 1%.
“Soon … I believe, the buyers will step in and take us out of this range,” the longtime trader and chart analyst said.
The trade Gordon put on to capitalize on the expected move highlighted his bullish outlook. He bought $1,300 monthly call options expiring in November and sold the $1,340 November monthly calls in what’s known as a vertical call spread, which cost him about $10.95 at the time of the trade on Thursday.
“That’s a $40 spread. That means that there’s $4,000 of potential profit here, but you’re not going to get that full $4,000. You have to pay a premium to get in,” he said, referencing that $10.95 cost.
That spread represents a bet that Alphabet shares could run to at least $1,300 by the end of November — a roughly 5% move from their current levels — if not all the way to $1,340, which would be a nearly 9% climb.
Gordon also called viewers’ attention to the standard deviation, a statistic used by many options traders to anticipate a stock’s likeliest future moves.
“They’re looking for a move as high as [$]1,340 in the life of these options … so the $1,340 call was chosen specifically because of that standard deviation,” he said.
And, as always, Gordon recommended to “position-size according to your specific risk profile [and] what you’re looking to do in your trading or investment account.”