Bears are on the prowl and market leaders are getting hit with profit-taking. These are the signals that encourage me to seek out short trades. Today we’re exploring three of my favorite stocks to sell.
The biggest fear haunting bulls ahead of earnings season was that profits would fail to live up to the lofty expectations built into stock prices. Starry-eyed investors have been piling into big-cap tech companies, driving the Nasdaq to the moon. Unprecedented fiscal and monetary stimulus have added fuel to the fire, but skeptics have long argued many equities were becoming detached from reality.
We’ve now had a handful of tech leaders report earnings, and many are falling afterward. These “sell the news” reactions justify becoming more defensive. It also has me warming to the idea of adding bearish trades to the portfolio for the first time in weeks. I’ve scanned my watch list for vulnerable names and these are three of the best.
Let’s take a closer look at the price action and where to place your trigger points.
3 Stocks to Sell as Bears Return: Snap (SNAP)
First up in this list of stocks to sell is Snap. Snap is a prime example of the situation described in my intro. It’s a tech stock that was running hot ahead of earnings but tumbled afterward. As a result, we now have a topping pattern that could be signaling a shift in its trend. The head and shoulders formation was completed and confirmed when SNAP stock breached $23 on Wednesday.
The downside follow-through has carried the stock to its rising 50-day moving average, giving us a clear line in the sand to trade from. With SNAP down 16% in a straight line, I’d prefer some consolidation or a mild bounce in this area to work off any oversold pressures. That will set up a better breakout pattern below the 50-day moving average. Today’s low of $21.50 is the trigger to watch.
You can short shares outright, or build an options spread. Since implied volatility is low, I like bear put diagonals.
The Trade: Buy the September $24 put while selling the August $20 put. The cost should be around $2.55 when the stock triggers.
Ambarella reported earnings last month and has been trending lower ever since. The losses have come while the Nasdaq has been powering higher, which says something about just how weak AMBA stock has been. This week’s drop brought AMBA to a critical support zone at $44. It’s also sitting below falling 20-day, 50-day, and 200-day moving averages.
Volume patterns have been ugly for the past month with a ton of distribution days. This shows me institutions continue to be net sellers. So far, support is holding. If it fails, I think we have a shot on the short side.
The Trade: Buy the September $45/$40 bear put spread for around $2.05.
The risk is $2.05, and the potential reward if AMBA falls to $40 is $2.95.
Last up on this list of stocks to sell is GoDaddy. Godaddy saw a flurry of selling crack its uptrend late last month. It has never been able to find its footing since and now sits below a falling 20-day and 50-day moving average. The past month has built a descending triangle pattern with prices continually probing support at $69 and the 200-day moving average.
The series of lower pivot highs suggest selling pressure is building. I think it’s just a matter of time before the floor gives way and we start a new downswing.
With earnings slated for August 5, I prefer a straight stock play or long put. That way, we can exit quickly.
The Trade: Short GDDY shares or buy the September $70 put if we break $68.15.
Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler didn’t hold positions in any of the aforementioned securities.