3 Top Stock Trades for the Week

top stock trades - 3 Top Stock Trades for the Week

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Editor’s Note: This article is updated weekly to bring you fresh trade ideas.

Stocks were reeling Monday. Media outlets are pointing to various hobgoblins spooking investors over the weekend, from China’s deteriorating property market and monetary tightening to Covid-19 and September seasonality. To respect the weakness, we’re going to focus on bearish ideas for this week’s top stock trades.

Support levels shattered across nearly every sector, so there’s no shortage of candidates for sellers to sink their teeth into. Stocks most sensitive to global growth bore the brunt of the damage.

Deploying shorts with the market as oversold as it is on Monday isn’t without risk. However, if you think the new downtrend has staying power, then rallies should be short-lived over the next few weeks.

Here are three tickers we’ll use to profit from continued weakness.

  • iShares Russell 2000 ETF (NYSEARCA:IWM)
  • S&P Metals & Mining ETF (NYSEARCA:XME)
  • Industrials Sector SPDR ETF (NYSEARCA:XLI)

They’re all exchange-traded funds (ETFs) for the simplest reason that during correlations, run to one during market corrections. As such, stock-picking doesn’t matter near as much as getting the direction right.

Top Stock Trades: iShares Russell 2000 ETF (IWM)

iShares Russell 2000 ETF (IWM) stock chart with break of 200 MA

Source: The thinkorswim® platform from TD Ameritrade

Survey the broad market indexes and do you know what you’ll discover? Small-caps got hit the hardest. This isn’t new. It happens nearly every time fear comes to town. Smaller companies are perceived as riskier than their larger brethren. Thus, they’re the first to get tossed when investors want to de-risk their portfolios.

IWM was down 3.2% and slicing below the 50-day and 200-day moving averages. The low end of its six-month trading range doesn’t come into play until around $209. Since the volatility spike is juicing options premiums, spread trades seem like a better play than buying puts outright.

The Trade: Buy the October $215/$209 put spread for $2.15

You’re risking $2.15 for the potential to capture $3.85 if IWM falls below $209 by expiration.

S&P Metals & Mining ETF (XME)

S&P Metals & Mining ETF (XME) with support break

Source: The thinkorswim® platform from TD Ameritrade

The last three trading sessions have seen a nasty turnaround in metal and mining stocks. Steel and copper companies were being decimated as global growth fears come to a head. Of all the liquid ETFs I follow, XME was down the most at -5.2%. The plunge is pulling prices below the 200-day moving average and significant horizontal support.

With bearish evidence mounting, it’s hard not to join sellers right here. As I said in the lead-in, my only concern is that an oversold bounce could materialize, so I’d size small enough so you can sit through it in anticipation of another leg lower.

Normally, I’d be all for buying puts on a $50 stock, but the implied volatility spike demands we sell something against it to offset the vega risk.

The Trade: Buy the October $40/$36 put vertical for $1.30.

You’re risking $1.30 for the potential to capture $2.70 if XME sits below $36 at expiration.

Top Stock Trades: Industrials Sector SPDR ETF (XLI)

Industrial Sector SPDR Fund (XLI) with major support break

Source: The thinkorswim® platform from TD Ameritrade

My weekend scanning found many bearish patterns in companies calling the industrial sector home. And that makes XLI a perfect final candidate for this week’s top stock trades. Rather than forcing myself to pick which industrial stock I like best, I’d rather build a short position on the entire sector.

XLI was testing the rising 200-day moving average. With horizontal support broken and prices now back below the century mark ($100), I think any bounce from here will get rejected in short order. If you want to use any strength to your advantage, you could consider scaling into the following trade. Enter half of the position now in case we don’t bounce, but leave the door open to entering the other half if a rebound materializes.

The Trade: Buy the October $100/$95 put vertical for $1.90

The max loss is $1.90, and the max gain is $3.10. To pocket the entire profit, XLI needs to fall below $95 by expiration.

On the date of publication, Tyler Craig was long IWM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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