If it looks like a bear and smells like a bear, then it’s probably a bear. For the FANG stocks, that concern is loud and clear.
From stabilizing oil prices to reduced investor fear over the state of China’s economic health, or possibly a Street more confident the Federal Reserve still has the market’s back — it seems everything is coming up roses for bulls and, in turn, market favorites like the FANG stocks.
Unfortunately, the extreme “risk-on” price action punctuated by a massive short-covering rally in the energy sector this past week, doesn’t pass the proverbial sniff test of a new bull market for FANGs and most other benchmarks.
Ironically, I’m quite optimistic emerging markets and the energy arena have bottomed after severe meltdowns measured in years, not just several weeks. But I’m not so sure about the FANG stocks.
As the possibility for new bull markets develop, the FANGs could instead be ripe for a prolonged “risk-off” period of their own.
With both FANGs and the overall market extremely overbought and smelling like a bear market rally, let’s look more closely at the technical picture. From there we can see which limited-risk, options-based strategies capitalize on their situations.
FANGs to Sell: Facebook Inc (FB)
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Admittedly, our bearish analysis on FB proved “early” and wrong enough as to warrant containing the loss and as addressed in the piece.
Having said that, FB stock’s overbought bearish flag has only moved deeper into zone resistance on weak volume. As much and as this FANG faces high-multiple pricing risk, the bear case has only grown more significant.
For a position idea, the FB April $105/$95 bear put spread for $2 is attractive in this FANG stock. This FB vertical maintains an expiration breakeven of $103 and slightly below the 50-day simple moving average.
The max reward of $8, or 400%, is secured if shares of FB crack slightly below the low of the bear flag and 200-day simple moving average at expiration.
Lastly, if investors continue to “like” FB? A 3% stop will help cut down the loss on what we’d consider to be a broken bear flag and reason to technically surrender.
FANGs to Sell: Amazon.com, Inc. (AMZN)
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Most recently and during the market’s corrective rout, we detailed a bullish out-of-the-money, put credit spread in AMZN stock, which paid out in full after a bit of exaggerated volatility in the FANG stock.
Currently, this FANG stock is now overbought, and much like FB, has developed a bearish flag on weakening volume.
More ominous, Amazon stock appears to have found resistance at its 50% retracement level from its December high, the 50-day simple moving average, as well as the prior breakout level from its October triangle.
On paper, this FANG is wildly more expensive than the richly priced Facebook. Further, in an environment where the “risk-off” trade could easily rear its head; AMZN looks well-positioned as a short.
Reviewing this FANGs options, the AMZN April $555/$525 bear put spread for up to $8 fits in nicely with shares breaking lower from the bearish Amazon chart pattern.
The AMZN vertical offers a potential return of 275%, or $22 per spread, if shares drop below $525 at April expiration.
At the same time, softer directional risk and using a 3% stop loss in AMZN stock will keep losses to a minimum while respecting a bullish break of the flag pattern.
FANGs to Sell: Netflix, Inc. (NFLX)
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The growth potential is huge for this FANG, but quite simply the cost of doing business outweighs those prospects, and that’s bad news for NFLX stock.
You don’t have to take my word for it either — simply appreciate the short interest of 18%, as the market obviously sees the chinks in Netflix stock’s armor.
On the price chart, NFLX is overbought and encountering a solid resistance area from around $100 to $108.
Within this price zone, NFLX bears have the 50- and 200-day simple moving averages, 50% retracement level and some likely underwater bulls looking to get exit, all of which serve as technical resistance in this FANG stock.
Checking the NFLX options board, the May $95/$90 bear put spread for up to $1.75 is attractive.
This FANGs vertical is positioned for earnings and can achieve a profit of $3.25 below $90 and well above the recent low near $80.
As with the other FANGs that we view bearishly, a stop loss slightly above resistance should initially help reduce the maximum loss by around 50%.
FANGs to Sell: Alphabet Inc (GOOG, GOOGL)
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Having said that, GOOGL is fighting similar problems embodied by the other FANGs and technically looks like a short.
Notably, GOOGL is showing a bearish flag set against the 50-day simple moving average and overhead price congestion following a failed breakout attempt.
After reviewing the options board for this FANG stock, the April $705/$695 bear put spread for up to $3 is attractive.
As with the other FANGs, I’d also be inclined to use a stop. With GOOGL, 3% or above $752, guards against a technical change of character and initially will substantially lessen the trader’s losses.
This FANG vertical can realize its max return of $7, or 233%, if GOOGL is down by a bit more than 4% and below the $695 strike at April expiration.
Technically, and as we can see from the GOOGL chart, that isn’t asking a lot as this FANG would still be able to trade above its recent low and the 200-day simple moving average and the bearish investor could take in the full profit.
Investment accounts under Christopher Tyler’s management currently own Facebook (FB) positions in client accounts, but no other securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
