Rocket Lab (RKLB) reported quarterly results after the close on Monday. Investors expected a loss of 2 cents a share. Worry about possible cuts to defense and aerospace spending has weighed on the stock. Shares fell double digits in the week after the midterm elections, which fed those worries.
The Chart
RKLB is down about 7.3% over the past year, lagging the XLI industrial ETF, which holds it. The whole space group has traded the same way. Looking back to June, when SpaceX first became a tradeable product, most of these names followed a similar path, with a sharp drop lately. RKLB sits in the middle of the group.
Since earnings in August, price has trended lower inside a channel drawn by two white lines that connect the highs, copied down across the lows. The bottom edge of that channel was tested the prior day. A steeper blue trend line also points lower into this earnings event.
Key Levels
- 37.57 - the yearly low, marked green, set almost a year ago.
- About 49 - a repeated floor that was broken.
- Near 62 - a floor that then turned into a ceiling.
RKLB trades below all its moving averages, and they are all falling and spreading apart. That points to a downtrend that is picking up speed. Earnings can act as a catalyst and quickly flip these technical reads. The stock is nearing the 30 level, the oversold line. A move below 30 would hint at more weakness if earnings disappoint.
Volume Profile
Volume profile shows where trading volume clustered at each price, not just when it happened. There is a node just below current price and a smaller one around 41 to 44. The 50 to 56 zone was given up after the point of control was lost. The point of control, the heaviest-traded level of all, sits at 69.54, marked by a thick red line. Heavy volume at low points is often read as an area bulls want to defend. A break below such a level can bring more downside, since it marks where buyers tried to hold.
The Trade
The November 20th expiration, the next monthly option 14 days out, shows an expected move of about plus or minus 20%. That is a large number for a short window, which signals high implied volatility. To cash in on that high volatility, consider a short put trade.
The position: short one November 20th 40/35 put vertical for a 1.20 credit. This bets the yearly lows hold, with a neutral to bullish lean. Max profit is the 1.20 credit. Max loss is 3.80. That is roughly 1-to-3 reward to risk. The break-even sits at 38.80, about 20.6% below current price, close to the expected move. The stock would need a move bigger than expected, or one about in line with it, to lose on this trade. Stay above that level and you keep the credit.
