Growth stocks were hot … now they’re not. And that places sectors like technology in a precarious position. October was the great unwinding of the beloved FAANG trade and many other tech stocks. How long it lasts is anyone’s guess, but for now, these names are anathema.
Technical deterioration multiplied this week as sellers stuffed last week’s recovery attempts with prejudice. Long-term support levels like the 200-day moving average gave way and distribution days are continuing to add up, creating a toxic brew that is undoubtedly sickening buyers.
I’ve sifted the tech sector for weak tech stocks to sell and discovered three tempting candidates.
Apple (AAPL)
The latest earnings report from Apple (NASDAQ:AAPL) took the wind out of its sails. Tepid forward guidance was all the reason traders needed to smash the sell button on AAPL stock. Yesterday’s swoon was significant for two reasons. First, it ushered AAPL stock below the 200-day moving average for the first time since April. History teaches that bad things happen below the 200-day. And even though it’s a king among tech stocks, AAPL is not immune to the lessons of history.
Second, AAPL stock’s correction officially became a bear market by reaching the 20% peak-to-trough threshold. While I wouldn’t recommend piling into shorts with the stock so oversold, I do suggest viewing rallies toward $200 with skepticism. Consider bearish option plays on any recovery attempt back toward that level.
Amazon (AMZN)
The correction in Amazon (NASDAQ:AMZN) has grown to become the largest in years. At last month’s lows, AMZN stock was down 28%. All major moving averages have been breached in the process. Significantly, we are now below the 200-day for the first time since February 2016.
A series of lower pivot highs and lower pivot lows has formed, confirming bears have wrested control of Amazon’s once-relentless uptrend.
For all its fury, the early November rebound did little in improving AMZN stock’s posture. Chalk it up as a dead-cat bounce. With AMZN working on its sixth down day in a row, it’s challenging to view today as a low-risk entry for new bearish trades.
Nonetheless, if you’re looking for a higher probability trade with a bearish tilt, sell the Dec $1800/$1810 call spread for $1.40.
Netflix (NFLX)
Although the trend in Netflix (NASDAQ:NFLX) had already reversed, it was the reaction to its latest quarterly report that acted as the nail in the coffin for NFLX stock. Nothing provides more explicit evidence of souring sentiment than a robust earnings-induced price gap higher that gets sold with prejudice.
The downswing that commenced the minute Netflix opened post-earnings on Oct. 17 sent the high-flier down $110 or just shy of 30% in two weeks. Since then, bears have continued to dominate Netlfix, which was once a Wall Street darling among other tech stocks. With NFLX stock now firmly below all major moving averages, the path of least resistance is lower.
Like AMZN stock, it’s hard to qualify Netflix as a low-risk entry for new bear plays. Either wait for a rebound in NFLX stock or use far out-of-the-money bear calls such as selling the Dec $340/$345 call spread for 55 cents.
As of this writing, Tyler Craig held bullish options positions in AAPL. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.
