The tides have turned against an industry that has long been favored by momentum traders. It’s a shame, sure. But when price charts sour and support zones break, its time to bid adieu to the leaders of yesterday. Today we’re highlighting three software stocks to sell.
On top of the increasingly bearish price action for this once-hot sector, there’s also the threat of seasonality that warrants dialing down risk. October has a bad reputation for hosting some of the worst corrections in history. And while November and December usually swoop in to save the fourth quarter, that doesn’t mean it’s a bad idea to adopt a defensive posture for the next few weeks.
I’ve scoured the software sector and found three stocks that are look particularly vulnerable. Let’s take a closer look.
Software Stocks to Sell: Twilio (TWLO)
At its peak, Twilio (NYSE:TWLO) shares were up 69% year-to-date. But with the beating seen over the last two months, those gains have been pared to only 19%. And while pullbacks are always bound to pop up, this has been far from a garden variety dip.
The selling has been severe enough to crack every significant moving average on the daily time frame. And the weekly time frame is also suffering from TWLO stock breaking the 50-week moving average for the first time since its meteoric ascent began last February.
Over the past month, TWLO has formed a low base pattern that is on the verge of breaking. Friday’s support probe signaled a break could be imminent. Watch for a close below $105 to confirm. Options traders could buy the Nov $105/$100 bear put spread for around $2.20 to speculate on further weakness.
Workday (NASDAQ:WDAY) has followed in the footsteps of Twilio. Its year-to-date gains once stood tall at 42%, but have since shrunk to only 5.6%. The bearish turnabout pulled WDAY stock below its 50-day, 20-day and 200-day moving averages.
Its late-August earnings release didn’t help matters. The selloff that followed broke a major horizontal support zone signaling investors were not pleased about the numbers and forward guidance.
Like TWLO, Workday shares boast a low base pattern with a clear level to trade from. If we close below $166, the bear trades are a go. Once again, bear puts are an attractive strategy. Buy the Dec $165/$155 put spread for around $3.70.
The 2019 ascent in Okta (NASDAQ:OKTA) has been impressive. All told, the software stock rose 122% year-to-date before sellers finally stepped in to reverse the trend. With Friday’s whack, OKTA stock fell below the 200-day moving average for the first time this year.
Volume patterns aren’t helping matters much. Distribution days have been piling up over the past six weeks revealing heavy selling pressure. The next downside support zone is $88 so consider that the next stop.
Implied volatility remains at the lower end of its range or the 18th percentile. Long puts or put spreads are the way to go. If Friday’s low is breached, consider buying the Nov $95/$90 put spread for around $2.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!