Underwater shareholders in 3M Co (NYSE:MMM) are coming up for air. But the six-day ramp is destined for failure. Allow me to lay out the bear thesis for MMM stock and provide a trade idea to profit.
First, bulls have clinched a big-league victory this week in the broader market. With the Nasdaq and Russell 2000 indices fast approaching new highs, risk-on behavior is ruling the roost. Unfortunately for 3M stock, its technical posture still stinks. Because of the relative weakness, traders can find a million better-looking bullish candidates.
Second, for all its fury, this week’s rally has done nothing more than returning the ailing industrial to its declining 20-day moving average and the unfilled earnings gap. Both have the potential to provide resistance. And, even if MMM does somehow power higher, there are plenty of other ceilings waiting to stymie further strength.
From a risk versus reward perspective, the setup is tempting. If 3M drops back to its recent lows, you’re looking at $14 of potential profit. As long as you bail with less than a $7 loss, you’re looking at a reward to risk ratio of two to one, if not better.
Throw it all together and 3M is a top bearish pick for the week ahead if selling pressure re-enters the market.
3M Bear Puts
Since the stock is trading for $205, buying a put option outright is a bit expensive. To reduce the cost, consider buying a bear put spread instead. The July $210/$200 put spread should do the trick.
You can buy it for around $4.80, which makes the potential reward $5.20 if MMM falls below $200 by expiration.
In timing the entry, I suggest waiting for signs that the stock is pivoting lower. If it rises for a day or two yet, that will allow you to pick up the put spread for a lower price.
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.
