- Opendoor Technologies (OPEN) stock is rallying but it’s a much riskier play than before.
- Bearish real estate trends outweigh potential positives for OPEN stock.
- Inspection of OPEN’s price chart reveals buyer’s remorse is likely.
Opendoor Technologies (NASDAQ:OPEN) stock has rallied with the best of them in recent weeks. It has gained as much as 63%. But that should hardly come as a surprise to investors familiar with risk assets in general.
During the first quarter of 2022, the stock market put together a historically fearful correction. The bearish environment helped knock OPEN down as much as 57% on the year and as much as 85% since putting together a peak in February 2021.
But risk assets of all sizes and operational pledges have soared higher the past couple weeks. What’s more, the strength has been backed by a robust bull market signal known as a follow-through day (FTD). No modern bull market cycle has occurred without having this key indication in place.
But there’s a catch. Not all FTD’s go on to produce meaningful bull markets. With that in mind, here’s why investors would be wise to avoid OPEN stock today.
Weeds Popping Up in Opendoor Technologies
On the surface Opendoor Technology sounds great.
OPEN stock was brought to the market last year by top special-purpose acquisition company investor Social Capital Hedosophia (run by Chamath Palihapitiya). On top of this, top “iBuying” competitor Zillow (NASDAQ:Z, NASDAQ:ZG) closed the door on that segment of its real estate business. And OPEN was already growing like a weed with its real estate flipping operation.
While all of these elements sound great, things aren’t so rosy for OPEN. For one, despite the celebrity, Chamath’s SPACs haven’t exactly knocked it out of the park. In fact, collectively they’ve knocked bullish investors down to mat with punishing losses.
Also, Zillow’s exit is no guarantee of Opendoor gaining the lion share of a market worth owning over the next couple years.
At the end of the day, buying and selling real estate properties on a massive scale like Opendoor does requires plenty of leverage. It also demands almost Goldilocks-like conditions for it to be a profitable enterprise.
Today that’s not the case and Opendoor is an increasingly risky proposition.
Factor in historically low interest rates now moving against a red hot housing market and record low inventory levels posing a much greater risk of re-inflating, OPEN stock could be faced with a “for sale” sign and no buyers.
Bears Are Knocking on Opendoor Stock’s Door
Source: Charts by TradingView
As discussed, shares of OPEN have enjoyed a nice rally the past couple weeks and kept up with other higher multiple or just riskier up-and-coming growth narratives.
But without getting ahead of ourselves and despite the positive implications of a broader market bullish follow-through day, coupled with the headwinds of rising rates and building housing inventories, the benefit of the doubt resides with a bearish outlook for OPEN stock.
The last four weeks have formed a potential bear flag on Opendoor’s weekly price chart. It’s not the first time this pattern has developed and paid off for bears either.
Since last year’s fourth quarter it’s a third attempt as revealed by the chart’s “BF#3” annotation. And with the bear flag failing against lateral resistance and beneath OPEN stock’s prior $10 net asset value deal level, the bears have the homefield advantage.
How to Approach OPEN Stock Today
With all of these factors in mind, a long put spread or long put purchase — if Opendoor shares confirm the bear flag’s weekly topping candlestick — might be worth considering. That’s especially true if you’re an investor that’s worried about OPEN stock’s challenges.
Alternatively, for investors looking to buy OPEN stock, at a minimum please demand a stronger foundation first. What might that look like? If OPEN’s monthly chart confirms the March candle through $10.05 coupled with a stochastics crossover, the technicals would favor a meaningful bottom with decent upside prospects.
I just don’t see the odds of that happening as likely. But if the market does see things differently, a long call or bull vertical are good bets. Both option strategies contain downside risk without requiring buyers to become unwilling sellers if unfavorable market conditions begin to unfold.
And should things go mostly as planned, the upside leverage gained with each of these types of investments should have OPEN stock investors looking more fondly back on the American Dream of capitalism.
On the date of publication, Chris Tyler owns SoFi Technologies (SOFI) (either directly or indirectly), but no other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.