Bulls deserve credit for jamming most sectors back to new highs this week. The rebound led all but a single U.S. Index to new highs. Tech stocks remain the laggard, with the Nasdaq still stuck below its 50-day moving average. Because resistance remains in force, there’s a chance this rally turns into a dead-cat bounce.
To prepare for that scenario, I’ve hand-selected a crop of vulnerable tech stocks. The lot of them saw increasing momentum during their last descent and could not climb above near-term resistance zones. As a result, the path of least resistance is lower. What’s more, since they’re all perched near a ceiling, the risk is low if you place your stop just above it. In other words, if this dead-cat bounce comes back to life, you can exit quickly with minimal loss.
That said, here are the three stocks bears should target.
Let’s breakdown each pattern and identify an options trade to profit.
Tech Stocks in Danger of Dead-Cat Bounce: Salesforce.com (CRM)
Salesforce.com was once a darling among investors. But, boy, has it fallen out of favor since November. While the rest of the market has been screaming higher, CRM stock has been plumbing the depths. The past two earnings reports delivered outsized price drops, hampering its recovery attempts. The latest one plunged prices below the 200-day moving average amid heavy distribution.
Combining souring fundamentals with deteriorating technicals creates a compelling environment for short trades. This week’s bounce lacks conviction. The volume is low, and each candle suffered intraday rollovers.
With Friday morning’s weakness, CRM is breaking the prior day’s low and could be starting its next descent.
The Trade: Buy the April $210/$200 bear put spread for $3.45.
Apple (AAPL)
While Apple hasn’t experienced the type of fundamental fallout as CRM, its technicals have seen their fair share of bearishness. From January’s peak, the tech titan has seen its share price decline as much as 20%. The 50-day and 20-day moving average caved along the way. Fortunately for fanboys, the 200-day moving average still stands untested.
Like CRM, this week’s bounce lacked any fireworks. Apple played along with the Nasdaq comeback, but its heart wasn’t in it. If this plays out like the last bounce attempt, a rollover will ensue. The 200-day moving average at $115 looms as the logical downside target.
I remain open-minded that tech can get its act together. If AAPL pushes back above $125, then I’ll abandon my dead-cat bounce thesis.
The Trade: Buy the April $120/$115 bear put spread for $2.00.
Zoom Video Communications (ZM)
Zoom rounds out my list of tech stocks with a pattern that mirrors its predecessors. Like CRM, its past two earnings announcements were underwhelming and delivered sucker punches to its price chart. It’s fallen below all major moving averages, including the 200-day. Volume during the recent post-earnings fallout was well above average, indicating that institutions were abandoning ship.
That’s not the type of action that inspires confidence to would-be buyers. This week’s three-day bounce hasn’t done anything to change the trend structure. With old support and all moving averages looming overhead, the odds still favor this being a dead-cat bounce.
I’ll start singing a more bullish tune if we climb above $380. Until then, this rally was born to be sold.
The Trade: Buy the April $340/$320 bear put spread for $8.50
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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