Downtrends are multiplying across the land, and bears’ ranks are swelling. Despite the fact that the Nasdaq Composite still sitting a stone’s throw from its peak, some 40% of the index has been cut in half. There’s trouble beneath the surface, making for narrowing leadership and, ultimately, more vulnerability. I scanned my watchlist of the downtrodden and discovered three ugly stocks to sell before they get worse.
And you don’t need to perform any mental gymnastics to grasp why lower prices are in the offing. The stocks below are stuck in nasty downtrends. And that matters greatly because trend direction is the most important of all technical signals. It sits atop the hierarchy of charting, demanding deference from all who employ technical analysis. In short, you’re far better off betting with the trend than against it.
That said, here are three struggling stocks that are poised for lower prices.
Let’s review each chart in greater detail and map out a smart options trade you can use to bank on further weakness.
Downtrodden Stocks to Sell: PayPal (PYPL)
Distance from Peak: -43%
PayPal could still fall a great distance despite getting cut nearly in half. Going into the 2020 pandemic, PYPL was sitting at $125, another $50 lower from here. Over the past six weeks, the daily downtrend has slowed and formed a sideways trading range. But instead of powering to the top side and building a compelling bullish breakout, it’s knocking heavily on the lower-end. The $177 support shelf has held long enough to where its failure would prove a significant breakdown.
If previous support breaks are any indication, we could see a swift move down to $160 if sellers press their bets. Given the higher volatility of the stock, I suggest using a spread trade over buying puts outright.
The Trade: Buy the Feb $175/$160 put vertical for $4.75.
You’re risking $4.75 to make $10.25 if PYPL stock falls to $160 by expiration.
Snap (SNAP)
Distance from Peak: -56%
Snap’s unraveling following last quarter’s earnings report has been deathly. For a single announcement to cause the stock to drop over 50% within a single quarter is horrific and speaks to just how much the Street hated the numbers. Prices are now submerged deep beneath all major moving averages.
Once again, it’s tempting to argue SNAP stock is down so much that it can’t go lower. But like PayPal, it was way, way lower before the pandemic. Shareholders are hoping the quarterly report on Feb. 3 saves them. For now, I think the downtrend continues. Prices are down big over the past three days, so if you want to wait for a bounce before entry, do so.
The Trade: Buy the Feb $37/$32 put vertical spread for $1.90.
You’re risking $1.90 to make $3.10 if SNAP drops to $32.
Downtrodden Stocks to Sell: Adobe (ADBE)
Distance from Peak: -26%
Adobe rounds out today’s hat trick of stocks to sell. Admittedly, it has held up far better than its predecessors, but it’s still in bear market territory and has a daily chart that looks grim. It has been a juggernaut stock over the past decade, and each dip was ultimately bought. But the current one feels different for two reasons.
First, this is the deepest we’ve fallen below the 50-week moving average the entire time. Second, growth stocks are arguably more loathed now than during the last few corrections.
Thursday’s rollover sparked a new downswing, and prices should fall below $500. Don’t let Adobe’s high share price deter you, either. We can build a cheap options spread.
The Trade: Buy the Feb $520/$500 put vertical for $8.45.
You’re risking $8.45 to make $11.55 if ADBE falls to $500.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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