Thursday’s rollover squashed the market rebound. Chart watchers are warning of a dead-cat bounce and I’m inclined to heed their warnings. If this is the beginning of another leg lower, it’s time to abandon ship on some of the weaker names in the market. Today I’m calling out three of the top dead-cat bounce stocks to sell.
My methodology for deciding which weaklings deserve to be named was straightforward. First, I focused on the technology sector since it was the epicenter of the market correction. Second, I scanned for tech stocks that exhibited relative weakness during the downdraft. While the Nasdaq held above its 50-day moving average, today’s candidates did not. As a result, they reversed their uptrends.
This week’s rally, then, deserves skepticism. With resistance now heaped overhead, the snapback looks more like a dead-cat bounce. If you’re looking for bearish candidates, here are my top picks for stocks to sell.
Let’s take a closer look at the charts. Then I’ll suggest which options trades will help you capitalize.
eBay (EBAY)
eBay fully participated in the post-March melt-up. Like many other tech companies, its business model positioned it for success during the global pandemic. Unfortunately, the past two months have finally seen sellers return in force. The topping process accelerated over the past two weeks with a break of the 50-day moving average.
With a downtrend now in place, rallies must be viewed with skepticism. The two-day rally looks weak and ripe for reversal. Thursday formed a bearish reversal candle that confirms sellers have returned. If this morning’s gap higher at the open fizzles, it’s game on for short trades.
The Trade: Buy the November $50/$45 put spread for around $1.60.
The max loss is $1.60, and the max gain is $3.40.
Activision Blizzard (ATVI)
The novel coronavirus has been good for Activision Blizzard shares as well. Shut-in consumers have embraced video games to stave off boredom. The uptick in demand was enough to send ATVI stock to a new record, but sellers have finally emerged to exact their pound of flesh.
Last week’s whack was extremely aggressive. Prices plunged below the 50-day moving average, and volume swelled to confirm institutions were smashing the sell button. Even though ATVI rebounded on Wednesday, the recovery saw low participation, and price never reclaimed the 50-day. Thursday saw a dark cloud cover candle formation, signaling a new downswing could be beginning.
To capitalize, I like purchasing bear put spreads.
The Trade: Buy the November $80/$75 put spread for around $2.15.
If ATVI stock is above $80 at expiration, you’ll incur the max loss of $2.15. If it falls below $75, then you’ll capture the max gain of $2.85.
Twilio (TWLO)
Twilio rounds out our trio of stocks to sell with an ominous topping pattern. By failing to crack through old resistance near $288, TWLO formed an equal pivot high on Sept. 1. The resulting double top formation was completed and confirmed this week when the price sliced through the 50-day moving average and horizontal support near $240.
Though TWLO stock participated in this week’s rebound, the gains were puny, and volume was virtually non-existent. Yesterday’s session formed a bearish reversal candle and confirmed that old support at $240 had become new resistance. The next support zone isn’t until $215, so that’s my first downside target if sellers press their bets here.
I’m continuing with the theme of bear put ideas.
The Trade: Buy the November $230/$220 put spread for $5.
The risk-reward is balanced at one to one, so you’re risking $5 to make $5.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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