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3 Stocks to Short in an Overbought Bull Market

stocks to short - 3 Stocks to Short in an Overbought Bull Market

Source: Shutterstock

Many analysts these days are now busy directing investors’ attention to breakouts and market leadership. But more than three weeks removed from a major market bottom and with monster overbought gains casting a wide net, today’s bull market is gasping for air in the short term. Now, for investors, it’s a better time to look for lower risk, higher reward stocks to short.

Less than two weeks ago, if a survey was taken on where investors would like to have their money allocated, most would have said anywhere but stocks. But following a dizzying market correction, which finished 2020’s first quarter with bearish teeth marks chomping firmly into the bullish investors’ buttocks, could they be blamed? Actually, they could.

By April 6, sorely needed, broad-based price confirmation from all the major indices strongly supported the idea March 23’s corrective low marked the beginnings of a new bull market. And even further removed from that bottom, investors are being greeted with headlines teasing of breakouts in names such as Amazon (NASDAQ:AMZN) or Netflix (NASDAQ:NFLX). And while that kind of price action is noteworthy, it’s not the most critical observation.

Right now, most other stocks like Apple (NASDAQ:AAPL), Home Depot (NYSE:HD) and key barometers such as the S&P 500 have quickly retraced 50% to perhaps 62% of their gut-wrenching bear market declines. Moreover, it’s a fierce rally now squaring off against key resistance and well-overbought conditions.

Given the current environment, in the near-term, investors should be waiting on pullbacks before making fresh buy decisions. Alternatively, investors can explore three key stocks to short:

  • Caterpillar (NYSE:CAT)
  • Baidu (NASDAQ:BIDU)
  • ARK Innovative Trust (NYSEARCA:ARKK)

Let’s take a look at why these three names look like leading names to short and how to profit from lower prices with stronger risk-adjusted positioning.

Stocks to Short: Caterpillar (CAT)

Stocks to Short: Caterpillar (CAT)
Source: Charts by TradingView

Caterpillar is the first of our stocks to short. According to a Bank of America Securities analyst note from Tuesday, the construction and mining equipment maker is in a hole that it’s unlikely to dig its way out of. Despite massive monetary and fiscal stimulus now in play due to the novel coronavirus, Caterpillar’s energy and mining markets are more convincingly pointing at a severe downturn in its business.

On the price chart, Wall Street’s reaction to the report confirmed a bearish weekly chart lower high pattern. With shares now challenging a former double-bottom broken once already during the March selloff, a second failure sets CAT stock up for fresh lower lows within its larger downtrend.

For this stock to short, I’d suggest waiting for a bit of confirmation. Specifically, I recommend pattern failure beneath $109 to enter and setting a blended stop-loss above $116. This strategy effectively contains risk. I’d also advise taking partial profits at $100, but anticipate much larger gains as we set our sights on new lows in the coming weeks.

Baidu (BIDU)

Baidu (BIDU)
Source: Charts by TradingView

Baidu is the next of our stocks to short. Blame it on what you will. From a U.S. China trade war or high-profile company missteps that shares have never recovered from, the past couple of years have proven challenging for BIDU stock investors. But the worst may be yet to come for this struggling tech giant.

Technically, a once promising 4-year long double bottom formed around BIDU stock’s 62% lifetime Fibonacci cycle and it has worked its way into a continuation bear flag. Ominously, the pattern received confirmation during last month’s market correction. With shares resting on top of the double bottom and the monthly stochastics forming a bearish crossover after nearly hitting overbought levels, this stock to short has a lot working in its favor.

For positioning and with earnings late next week, anticipating either favorable gap confirmation of BIDU’s bearish trend or the possibility for adverse price volatility is raised. My suggestion is to use a slightly out-of-the-money bear put spread. This type of vertical limits and reduces risk while offering big-time profit leverage. One favored combination is the May $95 / $80 priced for $3.00 with shares near $99.50.

ARK Innovation ETF (ARKK)

ARK Innovation ETF (ARKK)
Source: Charts by TradingView

The last of our stocks to short isn’t a stock, but an exchange-traded fund: The ARK Innovation ETF. Shorting ARKK is a more calculated and aggressive bet on emerging growth names outperforming on the downside as the markets shift further into profit-taking. It’s a wager that looks very approachable in the short term.

With ARKK’s portfolio concentrated in diverse cutting edge companies such as Tesla (NASDAQ:TSLA), Square (NYSE:SQ) and Roku (NASDAQ:ROKU), shares have obviously enjoyed a nice rally. In fact ARKK is up nearly 50% since its leading market low was established on March 18. But as March also reminded many investors, volatility can be a two-way street. And right now, there’s ample room for bears to make money with a counter-trend bet.

To be clear, longer-term and once today’s overbought conditions within the market are worked off, I’m a fan of ARK’s investment style. But for more nimble-minded investors, this is an ideal ETF to short. It is actionable today as shares of ARKK have just confirmed a pivot high for bears to position off in Wednesday’s session.

As the illustrated weekly view also shows, the high in ARKK stock is set against a test of the 62% retracement level and key lateral resistance. It’s certain technical reinforcement for bears in the short-term and should hold.

If this stock to short cooperates, I’d look to take profits and even reverse the position if shares trade down towards $40 – $44. Still, in a market which caters to both bulls and bears, keeping a sensible stop-loss 1% above the topping candle is definitely mandatory business for investors.

Disclosure: Investment accounts under Christopher Tyler’s management own positions in Square (SQ) and its derivatives, but no other 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.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/3-stocks-to-short-in-an-overbought-bull-market/.

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