Last week’s stock rally was impressive. But for all its fury, the rally did little to change the overall structure of the market trend. We still sit in the midst of a series of lower pivot highs and lower pivot lows on the S&P 500, Nasdaq, and Dow Jones. Not to mention their respective 50-day and 20-day moving averages are all cruising lower.
Against this backdrop, there are many tempting stocks to short. The beauty of the bounce is it two-fold. Beaten-down stocks that were desperately oversold are now less so. And with prices now testing resistance instead of support, poor risk-reward entries have now become rich.
With such a conducive environment, finding stocks to sell short is a cinch. I’ve scoured the marketplace and found three weakening stocks primed for a bear play.
3 Weakening Stocks to Short: Caterpillar (CAT)
Caterpillar (NYSE:CAT) didn’t just fall out of bed last month. It crashed through the floor and plummeted into the basement. And while optimists may cry “capitulation” and argue the selling is finished, I remain skeptical of the recent recovery attempts. For starters, a mountain of resistance looms overhead, threatening to thwart future rebounds.
Additionally, every major moving average is now pointing lower — suggesting sellers have wrested control of the trend across all time frames.
With last month’s earnings gap now filled, I think CAT stock is ripe for another down move.
Investors interested in options trading can buy the Dec $125/$115 bear put spread for one way to capitalize.
3 Weakening Stocks to Short: Micron (MU)
Semiconductors lie at the epicenter of all that ails the tech sector. And Micron (NASDAQ:MU) stock is one of the most bearish of the bunch. The downtrend that began in June has been extremely consistent. And we saw momentum increase on last month’s downswing suggesting sellers are gaining in strength.
Last week’s pop returned MU stock to potential resistance in the form of old support and the falling 20-day moving average. Friday’s doji candle and this morning’s descent are confirming the turn lower.
Buy the Dec $39/$34 bear put spread for $1.80.
3 Weakening Stocks to Short: Harley-Davidson (HOG)
Harley-Davidson (NYSE:HOG) rounds out today’s trio with another textbook bear retracement pattern. Last month’s break of major support at $40 was a win for short-sellers. It ended a seven-month bout of consolidation and signaled the renewal of HOG’s long-term downtrend.
With the recent rally, the stock is now testing the underside of old support. And if the principle of polarity holds true, it should turn into resistance. Watch for a break below Friday’s low ($39.45) to confirm. Then, sally forth with a put buy.
Purchasing the Dec $40 put near $1.90 should do the trick.
As of this writing, Tyler Craig held bearish options positions in CAT. Want insightful education on how to trade? Check out his trading blog, Tales of a Technician.