Robust earnings from Netflix, Inc. (NASDAQ:NFLX) are breathing new life into the Nasdaq Composite. And that’s benefiting momentum stocks like GrubHub Inc (NASDAQ:GRUB) which is up 5% in early morning trading. The launch couldn’t have come at a better time because GRUB stock was on the verge of breaching its 50-day moving average.
Let’s take a closer look at the recent action and see if there’s a trade to be had.
The weekly chart is a sight to behold. Four straight quarters of earnings gaps have propelled GRUB to the moon. The follow-through has been impressive creating increased momentum on each thrust. Although the stock was taken down a notch or two during the recent market turmoil, the damage is minimal.
In fact, the three-week retreat was needed to work-off the extreme overbought conditions. Perhaps most telling are the volume patterns. Instead of seeing a mass exodus during last month’s descent, we saw garden variety profit-taking with average volume.
Such benign conditions suggested this was a dip to be bought. And being bought, it is.
The daily chart reveals how buyers congregated at the 50-day moving average to defend their turf. Support at $95 also proved impenetrable, showing the bulls’ resolve. Today’s rally is launching GrubHub stock above a short-term resistance level at $101. Continued strength should carry GRUB back to its all-time high near $112.
Upcoming earnings on May 1st is the wild card. GrubHub is undoubtedly a mover and a shaker in response to these events, so you better buckle up if you end up holding into the release.
A Mouth-Watering GRUB Trade
If you’re willing to bet the good times keep rolling, buy the June $105/$115 bull call spread for $3.65. Since your risk is limited to the initial cost, the loss will be minimal if the stock gaps lower on earnings. The potential reward is $6.35, which provides an attractive 174% return on investment if GrubHub soars on earnings and sits above $115 at expiration.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, .
