3 Top Stock Trades for the Week As We Head Into July

The stress test results for banks are in, and investors are worried

top stock trades - 3 Top Stock Trades for the Week As We Head Into July

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Stocks entered the weekend on shaky footing. Banks found themselves at the epicenter of the selling after the Federal Reserve imposed new restrictions on the industry. In turn, the financial sector cracked support, and is a perfect place to shop for quality bearish ideas. And that’s precisely what we’re doing in this week’s top stock trades.

The latest round of stress tests from the Fed revealed worrisome capital levels among some banks. To minimize the chances of a prolonged economic downturn taking large financial institutions to the graveyard, the Fed is “suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income.”

That said, investors hated the news. The Financial Sector SPDR (NYSEARCA:XLF) tumbled 4.3% amid massive distribution, and the Regional Banking ETF (NYSEARCA:KRE) was hit harder — falling 6.1%.

So, when scanning liquid stocks in the industry, I found support levels giving way everywhere. And here are three of the worst looking ones:

  • Goldman Sachs (NYSE:GS)
  • Bank of America (NYSE:BAC)
  • CME Group (NASDAQ:CME)

All of them are top stock trades for bears, so let’s take a closer look at each one.

Top Trades for the Week: Goldman Sachs (GS)

Top Trades for the Week: Goldman Sachs (GS)
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Source: The thinkorswim® platform from TD Ameritrade

Heading into Friday’s session, Goldman was already wrestling with a head and shoulders reversal pattern. The neckline at $194 had held firm on three tests, but Friday’s puke proved too much. Volume soared to 9.5 million shares or roughly 300% of the average daily activity, as sellers chased the shares down 8.7% on the day.

Additionally, GS stock also broke below the 50-day moving average, giving further reason for bulls to take cover. For a downside price target, we can subtract the height of the head-and-shoulders formation ($29) from the neckline ($194). The bullseye of $165 correlates closely to an old support zone, so I like the projection.

Overall, bear put vertical spreads offer a low-risk way to capitalize.

The Trade: Buy the Aug. $180/$170 put vertical for around $3.20.

The risk is limited to $3.20, and the potential reward is $6.80.

Bank of America (BAC)

Top Trades for the Week: Bank of America (BAC)
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Source: The thinkorswim® platform from TD Ameritrade

After the massive rejection at its descending 200-day moving average earlier in the month, bears have dominated in BAC stock. Even before Friday’s support break, distribution days littered the landscape showing institutions flipped from buying dips to selling rips.

With Friday’s slip below horizontal support and the 50-day moving average, the daily trend has no officially turned from bullish to bearish. At $23, its price chart is cheap enough for purchasing puts outright if you want an aggressive bet. However, there’s a lot of prior consolidation between $20 and $23, so I wouldn’t be surprised if we see some choppy price action.

By using a put diagonal, we can build a trade that profits even if BAC trade sideways here.

The Trade: Buy the Aug. $25 put while selling the 10 July $22 put for a net debit of $2.44.

The risk is limited to $2.44, and the target reward is 75 cents.

CME Group (CME)

Top Trades for the Week: CME Group (CME)
Click to Enlarge
Source: The thinkorswim® platform from TD Ameritrade

Instead of providing yet another bank stock that mirrors the pattern of BAC and could prove redundant, we’re looking at CME Group for our final top stock trades idea.

CME cracked its critical support zone on Wednesday, and is already three days into its downswing. While a short-term bounce could be in the cards, there’s now a mass of overhead resistance at $170. Therefore, I’m skeptical at the lasting power of any kind of rally.

CME stock is also submerged beneath its 20-day, 50-day and 200-day moving averages. Plus, there aren’t any significant support zones until the $140 range, providing plenty of room for further losses.

The Trade: Buy the Aug. $160/150 put spread for $3.

The max loss is $3, and the max gain is $7.

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