Some battered stocks experienced relief this week. The market rebound spurred by dovish comments from Federal Reserve Chair Jerome Powell pulled many beaten-down companies back from the brink. But oil stocks remain ugly and are perhaps the most compelling stocks to sell here.
If anything, the three-day rally has made shorting stocks even more attractive because of the improved risk-reward ratio. Shorting oversold stocks that have already plunged into the abyss is ill-advised. But thanks to this week’s snap-back, now you don’t have to.
Many energy stocks that have been spanked senseless by falling oil prices saw a dead cat bounces this week. I think the strength will be temporary. Let’s look at three candidates worth teeing up for short trades.
Exxon Mobil (XOM)
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We begin with the biggest of them all, Exxon Mobil (NYSE:XOM). Since peaking at $83.49 in April, XOM stock has fallen as much as 15%. The correction was damaging enough to submerge it below all major moving averages. The 200-day, 50-day and 20-day are all pointing lower, which suggests rallies are suspect and prone to failure.
This week’s jump has been impressive, but it has done nothing to change the posture of Exxon’s downtrend. Potential resistance looms overhead in the form of an unfilled gap at $75 as well as an old ceiling at $77. A probe into either area will create an attractive swing sell setup.
While XOM stock may rally a day or two yet, look for a reversal sign, such as a break in the prior day’s low, to signal its next descent has begun. I like buying the July $75/$70 bear put spread for around $1.50 to $1.75.
Apache (APA)
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Smaller energy companies haven’t fared as well as Exxon in recent years. Take Apache (NYSE:APA), for example. Its long-term trend looks like death, and its price sits a stone’s throw from a new sixteen-year low. Like XOM, APA stock sits below descending 20-day, 50-day and 200-day moving averages. Rallies always have a high failure rate in this environment, and I think this week’s jump will prove no different.
The implied volatility rank is at its highest reading of the year (52%), which makes options premiums ripe for the selling. If you’re willing to bet APA stock sits below $30 at expiration, then sell the Jul $30/$32.50 bear call spread for 65 cents.
Valero (VLO)
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The theme of shortable rallies continues with Valero (NYSE:VLO). Where this one stands out, however, is in the momentum department. The velocity of its downtrend increased on the last downswing, revealing the bears are increasing in strength. With VLO stock falling as hard as it did last month, it will be challenging for it to mount a sustainable recovery.
What’s more likely is that the oversold bounce in VLO stock gives way to renewed selling pressure. A break back above $78 would merit reassessment, but as long as we remain below that, it’s game on for bear trades.
Implied volatility is lofty right now, so short premium plays are the way to go. Sell the July $80/$85 bear call spread for 84 cents.
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.
