The stock market has enjoyed a robust three-day bounce. It has been a rising tide lifting all boats regardless of sector or industry. But while bulls have enjoyed a much-needed reprieve, it gets much more challenging from here — particularly for the Ark Innovation ETF (NYSEARCA:ARKK), which remains in a nasty downtrend. Today we’re highlighting three ARKK stocks to abandon into strength.
This isn’t a new concept. When a stock is in a downtrend, all rallies are suspect. Overhead supply grows as sinking prices create more and more bag holders. These underwater longs are all tempted to sell into strength when they can exit at less of a loss. Indeed, selling rallies has been the way to play the entire ARK complex for months.
There are two ways to apply this idea. The first is to consider exiting existing positions into the strength. The second is to enter new bear trades to capitalize on the next descent.
I’m going to focus on the latter path using the following tickers:
They all remain vulnerable to more downside and offer tempting entries for short trades.
ARKK Stocks to Sell into Strength: Ark Innovation ETF (ARKK)
The correlation between all stocks in the Ark Innovation fund is exceptionally high, which is a fact that makes picking individual names largely unnecessary. Playing the entire exchange-traded fund allows us to dodge company news and earnings announcements. Yet another benefit is the robust liquidity of ARKK stock options. Tight bid-ask spreads and large daily volume make playing its options extremely easy.
The price trend is stuck beneath all major moving averages. As impressive as the past three days of strength have been, we’ve done nothing more than return to the declining 20-day moving average. And with sellers striking Tuesday morning, it looks like this will be another in a long line of failed rallies.
To capitalize, I like purchasing put spreads.
The Trade: Buy the April $65/$60 bear put for $1.70.
You’re risking $1.70 to make $3.40 if ARKK falls below $60 by expiration.
Roku (ROKU)
Roku shares have illustrated the power of a trend in motion staying in motion. Once the stock peaked last July, it has been a straight shot lower. And despite the destruction, ROKU still crashed further following February’s earnings report. The volume level accompanying the one-day 22% whack might suggest a washout or capitulation.
But, honestly, it’s too soon to tell. For now, we’ve bounced to fill the earnings gap, but are wrestling with significant overhead resistance.
That makes this a great spot to deploy bear trades. I would use a break below $135 as the trigger. It will signal a new downswing is beginning. Because of Roku’s sky-high volatility, spread trades are a must. Long puts are simply too expensive.
The Trade: Buy the April $135/$120 bear put for around $5.80.
The max loss is $5.80, and the max gain is $9.20. You can shrink the spread width to reduce the overall cost if desired.
ARKK Stocks to Sell into Strength: Zoom Video (ZM)
Surprisingly, the unraveling in Zoom Video Communications has been even worse than Roku. This week’s bounce has done nothing to change the trend trajectory. Its latest earnings report also came and went with little fanfare. On the positive side, at least we didn’t see a strong down gap. But, we also didn’t see any significant strength either.
The descending 20-day moving average has acted as resistance for months now, and the recent bounce has prices testing it once more. With ARKK stocks remaining out of favor, it’s easier to bet against the bounce than for it.
My logic for strategy selection follows the previous picks.
The Trade: Buy the April $120/$110 bear put spread for $3.75.
You’re risking $3.75 to make $6.25 if ZM stock falls below $110.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
