Two Trades to Buy When S&P 500 Pulls Back

Shah Gilani May 30, 2022

After seven consecutive down weeks for the S&P 500, it was no surprise that we finally saw some signs of buying in last week’s trading.

There was a lot of pent-up demand coming into last week, which helped drive prices higher, but I think some of the big moves we saw last week could give a little of those gains back as we make our way through the next two weeks.

This week, I will target two of my favorite stocks that had huge days during Thursday’s trading.

First up, I’m watching Alibaba Group Holding Limited (BABA), the Chinese e-commerce technology firm. It’s the Chinese version of Amazon.

On Thursday, U.S.-listed shares of BABA climbed 14.8%, representing the company’s largest-ever post-earnings percentage gain on record, according to Dow Jones Market Data.

For the quarter, the company reported adjusted earnings of $1.55 a share on revenue of $32.2 billion. Analysts expected Alibaba to report adjusted income of $1.07 a share on revenue of $29.9 billion.

“Revenue climbed 9% from the year-ago period, primarily driven by the revenue growth of the China commerce segment,” the company said in its earnings release.

Prior to Thursday’s beat, the company had posted three straight revenue misses. That’s not surprising, considering the COVID-19 wave in China had impacted the company’s business.

In the earnings call, the company reported they had started to resume express deliveries, which could represent a normalization of the situation in Shanghai. That’s a big deal because it indicates the company may be starting to get back to business.

Over the past month, the stock found support near $81.50, and it’s possible Thursday’s move, on better than expected earnings, could represent the turnaround I’ve been waiting to see.

As I mentioned a moment ago, Thursday’s trading was the largest post-earnings jump, and it represented the second-best single-day performance on record.

That’s encouraging, but it also may mean the stock is a little overheated and due for a brief pullback before heading higher again.

If shares of BABA pull back to $90.50 by June 3, 2022, lets buy the BABA July 15, 2022 $95/$100 Call Spread for $2.10 or less. Plan on exiting the BABA July 15, 2022 $95/$100 Call Spread for a 100% profit or if shares of BABA close below $80.50.

And that’s not all I’m watching.

I’m also watching Dollar Tree Inc. (DLTR), the operator of discount variety retail stores.

On Thursday, shares of DLTR soared 21.87% after the company reported better than expected Q1/2022 results.

For the quarter, the company reported net sales increased 6.5% to $6.9 billion comprised of $3.78 billion at Dollar Tree and $3.12 billion at Family Dollar.

Same-store sales climbed 4.4%, above forecasts for a 2.2% gain. The operating income margin rose to 10.6%, helped by Dollar Tree’s recent decision to sell most items for $1.25 at its namesake U.S. stores.

When you look at the beating that shares of Target (TGT) took in the prior week and compare that with how well DLTR did this week it’s pretty evident that consumers are trading down and looking for the best value, as they face unprecedented inflation.

That’s a huge plus for DLTR, but I don’t like chasing a discount retailer that jumped more than 20% in a single day.

If shares of DLTR pull back to $148 by June 10, 2022, let’s buy the DLTR August 19, 2022 $150/$155 Call Spread for $2.25 or less. Plan on exiting the DLTR August 19, 2022 $150/$155 Call Spread for a 100% profit or if shares of DLTR close below $134.00.



3 replies on “Two Trades to Buy When S&P 500 Pulls Back”

  1. l says:

    thanks. you are always right.

  2. Kathy tideell says:

    So do you buy June 10th or wait til July 15 a little confusing dot sure of when to buy and when to sell

  3. Roxanne says:

    What should you do when you can’t do the spread?

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