Despite a valiant recovery attempt Friday, sellers remain a force to be reckoned with. That, it seems, is the message accompanying this morning’s market weakness. But while passive investors continue to pray for a better day, tactical traders are using the volatility to their advantage. Or at least they should be. The key to befriending volatility lies in fading the extremes.
This week’s best trades include three ways to do so.
By fading the extremes, we mean waiting for the market to become overstretched up or down and then betting on a reversal. Some traders refer to this as mean reversion.
When overnight gaps multiply and intraday whipsaw hounds the market, it is incredibly tricky to guess the next day’s direction. So don’t. Instead, wait for sellers to push prices into oversold territory (or buyers to push into overbought) and then pounce.
Today’s trio of best stocks includes one stock that could get trounced and two that are due for a bounce.
3 of the Best Trades for the Week: Square Inc (SQ)
Momentum traders have been fawning over Square Inc (NYSE:SQ) shares for the past year. Ever since the mobile payments company broke out of its IPO base and blasted into space, volatility lovers everywhere have included SQ in their watchlists.
Spectators who missed its last ascent (which was epic) will be happy to know the ongoing tech drubbing has returned SQ stock to its prior breakout zone. Old resistance now has a chance to become support.
The 50-day moving average is also lending a hand here providing one more reason why buyers may step up to defend the $47 zone. Even if we see a slip below, Square shares are oversold enough to consider leaning into bullish trades.
I like selling puts to bank on the elevated volatility. Sell the May $40 puts for around $1.05.
3 of the Best Trades for the Week: Zillow Group (Z)
One of the strongest performers during the market’s last upswing is Zillow Group Inc Class C (NASDAQ:Z). Since pivoting at support in late-February, Z stock scored a scorching rally lifting eleven out of twelve days before profit-taking finally struck.
Since then its pullback has been orderly. Volume has been subdued suggesting garden variety register ringing versus widespread departure.
With Z having now retraced about 50% of its prior advance, we’re in a zone where dip buyers should emerge. Unfortunately for options lovers, the liquidity in Z stock options is terrible.
That means traders are relegated to playing the underlying only. Before plowing in, I suggest waiting for upside confirmation to prove buyers are indeed swooping in to halt the descent.
Buy Z shares on a break above Fridays high ($54.36).
3 of the Best Trades for the Week: iShares Barclays 20+ Yr Treas.Bond (ETF) (TLT)
For our final trade, we’re flipping the script by highlighting a bear play in the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT).
Weakness in equities has driven money back into the safety of Treasury bonds. The problem with plowing into TLT alongside this scared money is the weekly chart still looks bearish, and a heap of overhead resistance is looming overhead.
That has me thinking this rebound is a ruse, a sucker rally destined for failure. To capitalize, I suggest scaling-in to bear call spreads. That is, enter some now, but keep some dry powder for entering more later if TLT rises a bit further.
Sell the May $125/$128 bear call spread for 35 cents. Look to add around 50 cents to 70 cents.
As of this writing, Tyler Craig held bearish positions in TLT. Want more education on how to trade? Check out his trading blog, Tales of a Technician.