The extremely bearish reaction to yesterday’s Federal Reserve announcement has my inner short-seller itching for a trade. And it’s not as if there’s a shortage of downtrends to select from. Throw a dart, and you’re bound to find something limping into year-end. Today we’re focusing on tech stocks with an eye toward breakdowns.
Traders looking to get in on the action are faced with the challenge of identifying a low-risk entry. The S&P 500, Nasdaq and Russell 2000 are down 10.4%, 10.7% and 14% … for December alone!
With extremely oversold conditions settling on the market into Christmas, it’s hard to discover attractive risk-reward setups.
Fortunately, today’s picks detail three candidates that aren’t nearly as oversold as the broader markets. Here are three tech stocks on the brink of opportune breakdowns.
3 Tech Stocks on the Brink of Breakdowns: Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) stock’s fall from grace has been painful to behold. From its dizzying height of $292.76 reached two months ago, NVDA stock has fallen 54%. November’s earnings-induced plunge created oversold conditions warranting a bounce.
Well, the rebound has come and gone — and Nvidia stock finds itself right back at its lows. With the 20-day moving average now caught up and support looming close, I think a breakdown play is in order.
Buy the Feb $130/$120 bear put spread for around $3.70 to capitalize on continued weakness. The risk is limited to $3.70, and the reward is limited to $6.30.
3 Tech Stocks on the Brink of Breakdowns: Netflix (NFLX)
With this morning’s 4% thrashing, Netflix (NASDAQ:NFLX) shares have returned to support near $250. Because the stock has consolidated for the past few weeks, a breakdown here would be the beginning of a downswing. And that strikes me as a more responsible entry than chasing other stocks that have already suffered steep losses this month.
A breach of $250 could send NFLX stock toward filling its January earnings gap at $230. With over 10% of potential downside, bear trades seem attractive here.
Buy the Feb $250/$230 bear put spread for $7.80. The risk is limited to $7.80, and the reward is limited to $12.20.
3 Tech Stocks on the Brink of Breakdowns: IBM (IBM)
IBM (NYSE:IBM) presents a similar setup to its predecessors. In addition to the strong downtrend, it’s spent the past two months building a low base that is just now triggering with today’s 3% slide. The drop is carrying IBM stock to a new nine-year low reflecting just how ugly its descent has become.
Unfortunately, things are likely about to get worse.
To bank on further downside, consider scooping up put spreads. Buying the Feb $115/$105 for $4.15 should do the trick. The risk is limited to the initial $4.15 cost, while the reward is capped at $5.85.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.