The easy part of the oversold market bounce is over. What happens now will be the true test of whether the correction is genuinely finished or not. Growth stocks got caught up in the rebound, but I wouldn’t be too quick to dismiss further downside. Many are getting rejected at resistance and look vulnerable to another leg lower.
So, I’ve scoured my watchlist of the most popular names and found three worth selling into strength.
Betting on a well-established and long-lasting downtrend is one of my favorite ways to try making money on the short side.
When prices have been sinking for months, it’s hard not to view rallies with skepticism. When the last half a dozen bit the dust, why shouldn’t the current one suffer a similar fate? As they teach in technical analysis kindergarten, a trend in motion stays in motion.
That said, here are three companies positioned for more losses:
Their charts are grim and offer little hope to those letting price be their guide. Let’s take a closer look.
Growth Stocks to Sell into Strength: DraftKings (DKNG)
Do you know which growth stocks have suffered the most during this downturn? The unprofitable ones. DraftKings is a prime example. It has yet to print a single cent of earnings as a public company. There have been seven quarterly reports since its 2020 debut. Each revealed losses.
Of course, Wall Street didn’t care for the first 18 months. Optimism over the company’s potential and future profits was enough to bring buyers in. But things have changed. The Federal Reserve and monetary policy have turned from friend to foe. Now, higher rates have investors favoring companies that are profitable now over ones that might be later.
DKNG stock is down 70% from its peak, and this week’s rally just got denied at the falling 20-day moving average. So it looks like a trip back to $17, and lower is in the offing. To capitalize, I like deploying put spreads.
The Trade: Buy the March $20/$15 put spread for $1.30.
You’re risking $1.30 to make $3.70 if DKNG falls to $15 by expiration.
Yeti Holdings (YETI)
Yeti Holdings is plenty profitable, but its valuation was too stretched to survive a market correction unscathed. Thankfully, it’s fallen far less than DKNG (-39% versus -70%), but it’s still deep in bear country. The downtrend has been highly consistent with resistance at the declining 20-day moving average providing stiff resistance. We’re well below the 50-day and 200-day moving averages at this point as well.
Previous multi-day rallies have been perfect opportunities to enter bearish plays. I think the current bounce will fail similarly. Wednesday saw prices slip 2% to confirm sellers are entering the fray. Now is as good a time as any to pull the trigger.
The high volatility makes spreads a must. I like both bear calls and bear puts, depending on how aggressive you want to position yourself. Here’s an intelligent put spread to consider.
The Trade: Buy the March $65/$55 put spread for $3.
You’re risking $3 to make $7 if YETI drops to $55.
Growth Stocks to Sell into Strength: Zoom Video Communications (ZM)
Zoom Video Communications rounds out today’s growth stocks with a loss that’s even worse than DraftKings. Though down 75% from its highs, the once-loved-now-loathed hero of the pandemic still has further to fall. This week’s three-day bounce offered a brief reprieve but didn’t change the downtrend’s posture. With Wednesday’s rollover, we’ve now formed another in a long line of lower pivot highs.
The next downswing could quickly push prices to $120 and lower. Put spreads are my weapon of choice because of their low-cost and asymmetric payout.
The Trade: Buy the March $140/$120 put spread for $6.40.
The risk is $6.40, and the potential reward is $13.60.
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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