On Wednesday, markets fell, and I am sure you can find dozens of reasons for it in the media. Like almost always, it is just normal price action. I know it seems like the headlines cause the moves, but in reality most don’t. Yes, there are big candles that coincide with the breaking news but they don’t create a new price paths. The headlines merely expedite moves that were going to happen anyway. Since hot stocks have led this market rally so far, they are suffering most on these dips.
Today we look for those opportunities within them.
It is tough to convince people to ignore the headlines, but it is an edge that helps me find gems. Traders who know this look for opportunities when everyone else is looking for the reasons stocks are falling. Investors shouldn’t care why something is falling. What is more important is to know where the support lies so they can catch it. Grab the moment and seek the levels that make sense. Today we aim to do this with three hot stocks.
Two of today’s picks are momentum stocks. They move fast in both directions, so they are difficult to trade. They rarely give a clear signal to buy on the way down. On bad days they look like they are falling into an abyss. But therein often lie the opportunities to buy when everyone else is selling.
Since they don’t ring a bell at the perfect bottom I don’t expect to catch it. But the idea is to enter at places near bottoms so I can swing trade it into a profit.
What are today’s hot stocks? My picks are:
Hot Stocks to Buy: Workhorse (WKHS)
The hottest themes this year are EVs and the SPAC concept. These special purpose acquisition companies made it possible to bring a slew of electric vehicle makers public in a jiffy. Workhorse is one of them and they are riding the Tesla (NASDAQ:TSLA) coattails. As a result, WKHS stock is still up over 600% even after a 30% correction. Wednesday it fell 3%, so the investors are still scared.
The exciting part is the level it has reached. On Sept. 15, I wrote about it would make a great buy on a dip.
Well, here we are.
The zone around $22 per share for WKHS stock has been pivotal for months. It was a massive top in July then a huge launching pad in September. The rally from that point was 45%. The bears have tested the neckline already four times, and this is yet another knock on it. The stock has set a sharp descending lower-high trend, so now the range has tightened. Soon there will be a big move, but the trick is to guess which way. Since the level below has held, onus is on the bears to make it different this time.
My assumption is that support will hold one more time and cause a recovery rally back to $26. Even if it fails here, there is backup support into $19 per share. In fact, that pivot zone is even stronger. It would take a material change in the Workhorse thesis for the bulls to cede that.
Nio (NYSE:NIO) rallied 22% Wednesday. This should serve as a reminder that this group of stocks is volatile. Therefore conviction has to come with some doubt from both sides.
Fastly (FSLY)
Last night after hours, FSLY took a serious drubbing when it cut its forecast. Management delivered material news about its upcoming quarterly results scheduled for Oct. 28. The message is grim. It is very serious when a hyper-growth company says its sales are falling short of expectations. They cited a problem from one customer presumably ByteDance the parent company of TikTok. The stock is falling 29%, and usually a move this big is not a one-day event.
Nevertheless, I like the support zone near $86. I like it around $75 even more, as it has already survived six assaults, so I expect it would again.
This dip is a reason to consider starting a position in FSLY stock. Twilio (NYSE:TWLO) had a similar situation in May of 2017. Back then, it announced losing a large customer and the sellers panicked. The stock fell 25% to $24 per share. Now it’s $313 so this news is not a death sentence to Fastly. The price revision was tiny relative to the size of the drop.
From a trading perspective, I would stop myself out if my supports fail. But those who want to own FSLY stock for a while should buy here and add lower. As for the averaging down strategy, I avoid adding shares too closely together. This is in terms of time and price levels. Meaning I don’t add a few days after an initial position. I also need a big percentage drop too.
Since the situation is still fluid, equity investors should wait one more day at least. There will be margin calls so there might be a double dip. But on horrific days like this, the options is where the exciting action is. For example I can sell the FSLY Dec puts now and collect massive premiums. I get paid for the chance to own FSLY at a much lower price even from this morning drop. This is how I like to be bullish while leaving a buffer.
Wells Fargo (WFC)
This week banks started reporting their earnings. JPMorgan (NYSE:JPM) kicked it off with a great report. The problem was that the rally didn’t hold and it’s been nothing but red for the sector. JPM fell about 4% from high to low but WFC stock suffered worse, down 10% in two days. The problems are most likely from two reasons. The first is the wonky expectations that Wall Street insists on committing every quarter. Every time financials rally, the experts raise investor hopes that this time it’s different. Inevitably, they fail to sustain the rally.
The second problem is from the CARES act.
Banks had to comply with regulations and absorb the financial blows from consumer overheads. This includes all loans, so they took on a lot of loan loss reserves. This muddies the real bank performances and creates inaccurate forecasts. The stocks are falling because of wrong expectations.
Wells Fargo has been the black sheep already, so it takes news like this harder than the rest. But this time it has a friend in Citi (NYSE:C). It, too, now is under the regulatory scrutiny, so investors punish it a little harder as well.
But therein lies the opportunity. I like betting on the dark horse. In this case I like catching the WFC stock when it’s a falling knife. The pandemic lows should hold up, and this dip brings price within inches of that. I expect that the buyers will step in one more time.
This is a trading opportunity that could turn into an investment. WFC cannot pay dividends like it wants to and it has other operational restrictions. Things are so bad that it makes the incremental bad news less likely. If there isn’t more bad news, then the next headline should bring relief. This is where I like to sell puts into what others fear. This would get me long a stock that I want to own lower but get paid for it today.
Hot stocks rarely give investors the all-clear to buy. Often the best opportunities are when anxiety levels on Wall Street are high. Such is the case now, because the VIX is double the normal. Add to it the virus fears and the election uncertainty and you get a recipe for anxiety.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
