Beaten-down sectors are coming up for air, but their reprieve is bound to be short-lived. Or, at least, that’s what the price action suggests. Downtrends are full of sucker bounces peddling false hope. Take bank stocks for instance. Their trend is pointing lower, and this week’s rally is setting up an attractive low-risk entry for bear trades.
In analyzing market rallies, especially those that form in the context of a bear market, it’s important to differentiate between a trend change and a small bounce. The former has staying power and merits shifting to more bullish trades. The latter is destined to fail, and tactical traders use it to deploy bearish trades from a better vantage point.
With higher interest rate concerns now coming home to roost in the banking sector, the time to short bank stocks is now.
Here are three of the sweetest setups.
Goldman Sachs (GS)
Traders have been selling rallies with prejudice in Goldman Sachs (NYSE:GS) since the stock topped in March. Rather than trying to be a hero and betting that this week’s rebound is the end of the trend, why not take the easy route and bet on its demise?
Right now GS stock is testing horizontal resistance at $230. The 50-day moving average is also sitting heavy overhead. Throw it all together, and this looks like a textbook low-risk entry for bear trades.
Let’s build a high-odds play. Sell the Dec $235/$230 bear call spread for $1.60.
Wells Fargo (WFC)
The rally in Wells Fargo (NYSE:WFC) has been even less inspiring than Goldman’s. It popped up above the 20-day moving average, sure. But the descending 50-day and 200-day moving averages both look angry overhead. Don’t fight the trend, friend.
It’s possible we revisit $50 before all is said and done. To position yourself for profit, I like buying put spreads over purchasing puts outright because of the high implied volatility.
Buy the Dec $55/$50 put spread for around $2. The risk is limited to the initial $2, and the reward is capped at $3.
SPDR KBW Regional Banking ETF (KRE)
Not all bank stocks are suffering proportionally. The pain in regional banks has been particularly acute, and that makes the SPDR Regional Banking ETF (NYSEARCA:KRE) a particularly attractive pick for selling into strength here.
KRE’s downtrend accelerated in momentum during its most recent plunge. And while it may be the type of puking that signals capitulation and thus the end of the trend, I think we have more weakness ahead. The descending 20-day moving average has proved formidable resistance during the past six weeks. So with the stock close to touching it once more, I think sellers are about to take control.
To capitalize, buy the Dec $55/$50 put spread for $1.75. The risk is limited to your initial investment, and the reward is limited to $3.25.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.