Yesterday was a great day for the broader market. But if you’re looking for “Turnaround Tuesday” to lead to more compelling risk-adjusted gains, it’s time to be selective with new investments. Moreover, the time is right to consider hedging those stocks to buy with stocks to short which look equally great off and on the price chart. Let me explain.
Wall Street has moved on. At a minimum, risk-hungry investors are doing their best to brush off a still-growing coronavirus. At the same time we have earnings season and Federal Reserve-related optimism — and maybe a Pavlovian buy-the-dip response. And with Monday’s brief selling contagion followed up by Tuesday’s reflexive gains that recouped most of the damage, what could possibly go wrong, right? Wrong.
With the broader U.S. markets stretched in more than one way, it remains a smart time to be more defensive with new stocks to buy. It’s even a smart time to consider an opportunistic stock to short for that portfolio.
In the following list is a diversified group of smaller and large-capitalization stock picks to put on your trading radar for going long and short with increased confidence.
Stocks to Buy: Cisco (CSCO)
Cisco (NASDAQ:CSCO) is the first name to put in your portfolio. Cisco needs no introduction as a well-established, large-cap technology behemoth and Dow Jones Industrial Average constituent. It’s that kind of security, along with a nearly 3% dividend and below-market price multiple, which helps make the case for owning CSCO stock. But it’s the price chart which makes this an even more agreeable stock to buy.
As the provided detailed monthly view shows, Cisco shares have confirmed a corrective low formed in December within its uptrend this month. The buy occurred as CSCO stock traded above the prior candle’s high of $48.02. The signal price aligns itself nicely with the upper edge of a key support zone backed by price congestion and key Fibonacci levels. What’s more, supported by an oversold crossover stochastics set-up, there’s plenty of good reasons to be bullish.
Buy CSCO stock on a bullish crossing of $48.12 for added trend confirmation without giving away the house. I’d set a blended stop-loss below $44.35, which I believe is a sufficient risk allowance off and on the price chart.
Luckin Coffee (LK)
Luckin Coffee (NASDAQ:LK) is the next of our stocks to trade. Ever wish you could own the next Starbucks (NASDAQ:SBUX)? Most of us would jump at the chance. And now you can. China’s Nasdaq-listed Luckin is growing like crazy and making a name for itself overseas.
A storied stock performance like the one SBUX has enjoyed over the past couple decades isn’t guaranteed. Still, strong fundamentals and a smart business strategy are now backed by a classic, albeit quick and oversold corrective move of 29% which also tested LK stock’s lifetime 38% retracement level. In my book, that’s enough to pull the trigger on this stock to buy.
Shares of Luckin are in position to buy today following Tuesday’s daily chart confirmation of a pivot low. But as a smaller and volatile growth name with obvious headline risks at the moment, I’d caveat the long exposure with an ironclad options strategy such as a slightly out-of-the-money bull call spread.
Stocks to Short: 3M (MMM)
3M (NYSE:MMM) is the last of our stocks to trade. MMM stock is similar to Cisco in a couple ways as it’s another blue-chip name. But unlike CSCO stock, 3M is a well-positioned stock to short. While the Dow Jones rebounded nicely off Monday’s coronavirus-driven lows, shares of MMM tumbled nearly 6%.
But that’s not the worst of it.
Behind the price slump, 3M announced both a grand jury subpoena tied to an environmental probe and company restructuring due to weak business conditions. And technically, a challenging two years for MMM stock is now shaping up for more damage in 2020.
Shares are under pressure within a bearish-looking monthly flag pattern. Traders could wait for secondary confirmation. However, I’m of the mind a “terrible Tuesday” for MMM is sufficiently damning evidence in the scope of things. Still, remember to put a Post-it on your screen to exit if this stock to short takes out a modified exit above $172.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.