The specter of a trade war haunted the halls of Wall Street last week. With the February crash still fresh in their minds, traders were all too willing to part with their wares heading into the weekend. Selling pressure accelerated into the close on Friday, creating a monster-size bearish candlestick.
With the growing technical deterioration now littering the landscape, it’s time to offer up a few bear trade ideas. This week’s selection provides a diversified list to choose from, including a drug company, a retailer and a kingpin in the aluminum industry. Two of the three are on the precipice, one banana peel away from a major breakdown. The third already slipped on Friday.
While Monday’s up gap is breathing new life into buyers, I suspect the optimism may be short-lived. When sellers once again wrest back control, today’s three bear stocks are well positioned for pain (or pleasure, if you’re short).
Behold, three bear trades with big-league breakdowns.
3 Bear Trades with Big-League Breakdowns: Merck (MRK)
Merck & Co., Inc. (NYSE:MRK) shares top our list with a volatility-riddled price chart. Over the past six months, we’ve seen many outsized gaps crop up which have created one mess of a chart. However, with time, the dominance of bears has been made manifest. Since February, MRK stock has created a low-base pattern near critical support at $53.50.
With the stock submerged beneath all major moving averages, it’s hard to be anything but bearish for now. If buyers can’t defend $53.50, then shareholders better watch out below! The next support level doesn’t come in until $48, so Merck has plenty of room to freefall if the current floor gives way.
Buy the May $55/$50 bear put spread for around $1.95.
3 Bear Trades with Big-League Breakdowns: Target (TGT)
Unlike its predecessor, Target Corporation (NYSE:TGT) shares already suffered a breakdown on Friday. Furthermore, TGT stock boasts a topping pattern — we’ll call it a quasi-double top. This month’s drubbing carried Target back below its 50-day and 20-day moving averages. Preceding the beat-down the stock failed to take out its prior high at $78, creating the double top formation.
Reversal patterns like this are supposed to be completed and confirmed by a break of support. Friday’s breach was arguably the confirmation top spotters have been waiting for. The last hope for TGT shareholders is that Monday’s up gap creates a false breakdown. Otherwise, more downside will be in the offing.
If you think bears maintain the upper hand then buy the May $70/$65 bear put for $2.
3 Bear Trades with Big-League Breakdowns: Alcoa (AA)
For our final pick, we turn to the metals industry which was one of the hardest hit areas in last week’s downdraft. Alcoa Corp (NYSE:AA) shares returned to the lower-end of their two-month base and could be primed for another breakdown. A break of $44 would also take AA stock below the pivotal 200-day moving average spelling trouble for its long-term trend.
Falling below $44 would then bring the $40 zone into play. It’s the next major support area and should act as a magnet for the weeks ahead.
Buy the AA May $45/$40 bear put spread for $1.65.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want more education on how to trade? Check out his trading blog, Tales of a Technician.
