It’s not just bulls that should be cheering this week’s rebound. Bears should be too. The recent beatdown left many down-trending stocks desperately oversold. It’s a situation that carries a poor reward-to-risk ratio for bearish trades. But now that we’ve bounced, I’m seeing dozens of downtrends ripe for new entries. Of course, the rally also offers a more dignified exit for wounded shareholders looking to bail at less of a loss in these weak stocks.
I’ve scanned my watchlist and found three of the most vulnerable tickers to consider. Their trends saw increased momentum and volume on the last descent, making it all the more likely this bounce is one of the dead-cat variety. In other words, failure is highly likely and a rollover potentially imminent. At any rate, the current perch offers a more favorable entry to short sellers, not buyers.
That said, here are my favorite weak stocks to bet against.
Let’s break down the technicals. Then I’ll suggest which options trade looks best.
Weak Stocks to Dump: Disney (DIS)
It pains me to have Disney on any bear list. It’s as blue-chip as you get and has iconic brands that have made every downturn an exciting buying opportunity since the beginning. But there’s no denying the ugliness of the price chart. And that, above all else, must drive our short-term outlook. Traders hated last month’s earnings report, and the punishment was swift.
Once we cracked the $168 support zone, the price tanked, and we didn’t find a bottom until $142. But, while it was “a” bottom, it’s too soon to tell if it was “the” bottom. And that makes me skeptical of the recent bounce. If we roll over and break back below the 20-day moving average ($152), bear trades are worth a shot.
I suggest a more conservative play because I don’t think the next down-leg will be nearly as vicious as its predecessor.
The Trade: Sell the Jan $165/$170 bear call spread for 65 cents.
Consider it a bet that prices will stay below $165 for the next month.
DocuSign (DOCU)
After the hellish 41% drop on earnings into the middle no-man’s land on its chart, DocuSign could be dead money for a while. I’m reminded of a phrase I once heard, “if they don’t scare you out, they’ll wear you out.” In my experience, such epic drops usually weigh on the stock for the quarter, making it difficult for a speedy recovery. Investors often need to see the fundamentals turn around before swooping in to buy. And that takes time.
For now, rallies remain suspect. There are legions of underwater longs that would love to get out at less of a loss. Unfortunately, it creates an environment where overhead supply is heavy. Rather than bet DOCU stock gets crushed a second time, I want to wager it’s simply unlikely to mount a strong comeback in the next month. And that suggests a bear call is once again the way to go.
The Trade: Sell the Jan $180/$185 bear call spread for 50 cents.
Weak Stocks to Dump: Peloton (PTON)
The final of today’s weak stocks to dump is Peloton. While its predecessors and virtually every other single stock in the market scored a vigorous rebound this week, PTON stock barely budged. And when it did happen to build a single-session rally, prices got destroyed the very next session. If that doesn’t signal the stock is extremely weak, then I don’t know what does.
Prices are falling to a new low on Friday. If you want to bet the downtrend continues, here’s a put spread with a tasty payout.
The Trade: Buy the Jan $40/$35 put spread for $2.15.
On the date of publication, Tyler Craig held neutral options positions in DIS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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