The oversold bounce is well underway in tech stocks this morning. Whether it sticks remains to be seen, but bulls certainly aren’t complaining. Many of the heavy hitters like Alphabet Inc (NASDAQ:GOOGL) have rallied well off of the lows. Currently, GOOGL stock sits more than 3% higher than Monday’s depths.
That’s some volatility for a company as big as Alphabet! Especially given the sleepy market plaguing traders this year.
With GOOGL stock having recovered about half of its losses, though, questions abound.
Was that it — a quick hit and run from sellers to scare the children? And now the bull market in tech is back on? Or is this a bounce of the dead-cat variety? One destined for failure?
While I suspect it’s the latter, I’ll throw out a trade idea that could still work regardless of which scenario plays out. But first, let’s analyze Alphabet’s chart to see if there are any clues to be had.
The enormous volume accompanying the past two trading sessions is probably the best feather in the bears’ cap here. It reeks of institutions ringing the register which is usually a drawn out ordeal, not a one-off event. Typically these distribution days continue to weigh on a stock for a spell before the selling pressure abates.
Click to Enlarge
The other admittedly weaker argument for continued concern is the break of support that transpired during last week’s plunge. Alphabet stock breached both the 20-day moving average and a pivot low ($982) during the selling sortie. And as chartists are wont to utter, old support often becomes new resistance.
Both levels could challenge the stock on its rebound attempt.
Fade-Trade GOOGL Stock
If you’re willing to bet that Alphabet has trouble reclaiming its old highs, try selling the Jul $1,035/$1,040 bear call spread for 60 cents or better. To lose at expiration, Alphabet would have to rally another 6.6% from here.
The max reward is limited to the initial 60 cents and will be captured if the stock sits below $1035 at expiration.
To minimize the risk consider exiting the trade if GOOGL stock rises to $1,035.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
