Today I want to show you the dynamics of a momentum trade. Last week, we watched shares of DocuSign (NASDAQ:DOCU) fall off a cliff after the company reported weaker than expected revenue. Shares fell from about $233 last Thursday to a new 52-week low of $131.51 on Friday.
At the time, market momentum was negative. And what you can see in this chart is a complete, total panic over a bad earnings report.
When a stock moves into this level of oversold conditions, I’m certainly paying attention. And when S&P 500 momentum returns to the markets, I’m doubly interested in scooping up a company that is beaten down and could reverse quickly as capital flows back into the large-cap stocks that dominate the market.
DocuSign Insider Buying
Then add on the news that the CEO of DocuSign just snapped up the stock on the cheap, and you are witnessing a 10% jump in the stock on Wednesday.
I highly recommend focusing on oversold conditions just as the market’s momentum returns to the market. These CEOs are paying close attention to the numbers, and timing their purchases. People piled back into the stock today on news of the CEO buying $4.8 million in company stock.
But if you used oversold conditions plus momentum, you could have beaten the announcement with a nice speculative play. We’ll talk more about how to identify these two figures (and remember I always talk about market momentum every single day) in the coming days.
Bullish on Biotech
The next leg back into the market right now appears to be biotech stocks. Following a nice three-day move on the sector, early investors and traders were rewarded with some very nice gains.
I would recommend that if you’re going to speculate, use the SPDR S&P Biotech ETF (NYSE:XBI). The only risk that I see here is that we have options expiration next week, and there could be some volatility.
This is a good opportunity to perhaps engage in a multi-step trade where you either engage in poor man’s covered calls for near-strike options or simply buy two legs of an options trade with a focus on the January 21 strike price. I’ll circle back with a few ideas on the biotech space tomorrow.