Bears scored a shot across the bow Tuesday, especially in bank stocks. Indeed, financials were the hardest hit sector as falling interest rates sent a shock through the entire space. Wells Fargo & Co (NYSE:WFC) counts itself as one of the weakest stocks in the bunch. In fact, WFC stock fell to a new ten-month low on heavy volume.
The fresh breakdown won’t come as a surprise to long-time watchers of WFC. Weakness has been its watchword for years now. Check out its Comparative Relative Strength (CRS), shown in the lower panel of the accompanying chart.
It compares the performance of Wells Fargo to the broader financial sector — as reflected by the Financial Select Sector SPDR Fund (NYSEARCA:XLF).
The multi-year descent confirms WFC has been lagging its sector for a long time now. If you go back far enough, you’ll discover the relative strength indicator just fell to a new seven-year low.
The underperformance of Wells Fargo makes it a prime bear target. For traders believing that weakness begets more weakness, what better candidate is there than a lagging stock locked in a lagging sector?
A brief survey of WFC’s price chart reveals a downtrend submerged beneath a falling 20-day and 50-day moving average.
Yesterday’s plunge breached a support level that had previously halted multiple selloffs. The significance of the breakdown is confirmed by the heavy volume suggesting shareholders were fleeing en mass.
The WFC Trade
With the path of least resistance pointing lower, it’s time to throw your lot in with bears. Buy the Nov $50 puts for $1.80. The risk is limited to your initial investment, which you will forfeit if the stock sits above $50 at expiration.
The reward is limited only by the stock falling to zero, so start rooting for an outsized plunge.
As of this writing, Tyler Craig didn’t hold any positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.