EBAY Popping to New High and Unlocking More Upside Potential

One of my routines to gauge the current market action is to start at the StockCharts.com Dashboard and take a look at the Market Movers - Most Active for the S&P 500. The link at the bottom left of that widget allows me to open up the RRG for these symbols and see how today's price action fits in with the relative rotation.

The Relative Rotation Graph at the top of the article shows the weekly rotation for this set of symbols. The one stock that stands out in a positive way is EBAY, positioned inside the improving quadrant and heading in a NE direction towards the leading quadrant.

That seems reason enough to bring up the price chart in combination with relative strength.

On this weekly chart, we see that EBAY popped above overhead resistance, which is actually more of a range between $58.50-$60.50 than a single level. After reaching a high at $64.85, the price dropped back to around $61 at the moment, which means that we can now see if the old resistance area will start to act as support and catch the decline off the high, before moving higher.

The daily chart reveals that most of this price action took place today when EBAY gapped higher, making the $58.50 - $60.50 area even more of a solid support level.

As EBAY just moved into uncharted territory, the upside is wide open while the downside seems well protected at the aforementioned support zone. This gives a good entry opportunity around current levels, with stops somewhere at the bottom of the gap area or slightly lower.

Relative strength and the position and direction of the tail on the daily RRG certainly support more upside movement, outperforming SPY in the coming days/weeks.

How To Play

Of course, you can buy the stock outright, but don't forget that there are also plenty of possibilities to benefit from some upside movement using options.

Deep in the money calls will give you an almost similar exposure to upside movement in the stock price, but with less risk. April Calls 50 are trading a little over $11. This means that you will be buying EBAY at $61 (50 strike + 11 premium) which is more or less the current stock price. When the price goes up, you will benefit 1:1 with the stock price. When the price goes down, the value of the Call option will initially also decline (almost) at a 1:1 ratio, but, at a certain point, the option price will decrease less fast than the stock price.

Of course the option will expire, in this case in April, while you can hold the stock indefinitely even when the price goes down.

#StaySafe, --Julius

My regular blog is the RRG Charts blog. If you would like to receive a notification when a new article is published there, simply "Subscribe" with your email address.