- Coinbase (COIN) invalidated its recent breakout by falling back below the 50-day moving average.
- Roku (ROKU) formed a double top pattern at stiff resistance.
- Spotify (SPOT) is rolling over to begin a new down-leg in its long-term descent.
The stock market has been making good progress over the past few weeks. Even the beaten-down Ark Innovation ETF (NYSE:ARKK) got in on the fun, enjoying a monster 39% climb that pushed shares above the 50-day moving average for the first time since last November when its stock price stood above $120. But the past two days have seen the more speculative growth names get whacked. And that doesn’t bode well for ARKK stocks moving forward.
To capitalize on what could be the next phase of the unwind, I found three vulnerable components of the fund. They either lagged during the recent bounce or are rolling over hard enough to invalidate any bullish signals seen during the rebound. In either case, lower prices beckon, and there is an opportunity for bears to make bank.
We’ll take a brief look at each chart. Then I’ll map out an intelligent options trade to consider.
ARKK Stocks to Sell: Coinbase (COIN)
The bounce in Coinbase (NASDAQ:COIN) stock was enough to break through two short-term resistance zones and the 50-day moving average. The best-case scenario would have been for a higher pivot low to form above the 50-day moving average, solidifying bulls’ foothold and sparking a second phase of the nascent uptrend. Unfortunately, Tuesday’s decline cracked below what should have been new support and signaled buyers’ short reign was ending.
Since falling below the 50-day, prices have been sinking like a stone. In early-morning trading Wednesday, COIN is already down another 5.5%. There’s no support until $150, so that’s the next downside target.
The higher volatility and price tag make long puts a pricey proposition. Instead, consider purchasing a put spread.
The Trade: Buy the May $160/$150 put spread for $3.80.
You’re risking $3.80 to make $6.20 if COIN falls below $150 in the next 44 days.
Roku (NASDAQ:ROKU) twice tried to clear the 50-day moving average. Both bids failed, creating a short-term double top pattern. It looks like an “M” and may well have just murdered the recovery. With Wednesday’s quick 7% loss, we’ve officially completed and confirmed the reversal pattern. I now view a trip back below $100 as likely.
Like COIN, there simply isn’t any support between here and there. It gives bears a clean runway to press their bets. Roku stands as a poster child for shorting an underperforming stock in a weak sector. There aren’t any guarantees, but we’re stacking the odds in our favor by shorting weakness instead of fighting against a trend that’s bursting to new highs.
Though slightly cheaper than Coinbase, the above-average volatility still makes buying puts tricky for smaller traders. We’re once again going with a long put spread for a more affordable option.
The Trade: Buy the May $120/$100 put spread for $8.60.
The max loss is $8.60, and the max gain is $11.40.
ARKK Stocks to Sell: Spotify (SPOT)
Spotify (NYSE:SPOT) rounds out today’s pitch with yet another chart that’s rolling over. Its inclusion is unfortunate because I would have had it on my shortlist of ARKK stocks to buy one week ago. It had a clean cup-and-handle pattern with an easy buy signal above $160. But it never triggered, and Tuesday’s bearish engulfing candle placed it in a precarious position.
Prices are falling another 3% Wednesday morning and testing the 20-day moving average. A break here opens the door to a trip back to last month’s low of $118. Consider using the low of today’s session ($141.76) as the trigger for entering.
Bear puts remain the way to go.
The Trade: Buy the May $140/$120 put spread for $6.25.
You’re risking $6.25 to make $13.75 if SPOT sinks to $120 by expiration.
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.