Downtrends are multiplying across the country and bear ranks are swelling. Despite the fact that the Composite Nasdaq still close to its peak, some 40% of the index has been halved. There are problems below the surface, which reduce leadership and ultimately increase vulnerability. I went through my underdog watch list and discovered three ugly stocks to sell before they get any worse.
And you don’t need to perform mental gymnastics to figure out why lower prices are in sight. The stocks below are stuck in bad downtrends. And that matters a lot because the direction of the trend is the most important of all technical signals. It sits at the top of the charting hierarchy, demanding deference from all who use technical analysis. In short, you are much better off betting with the trend than against it.
That said, here are three struggling stocks that are about to drop in price.
- Pay Pal (NASDAQ:PYPL)
- Snapchat (NYSE:BREAK)
- Adobe (NASDAQ:ADBE)
Let’s take a closer look at each chart and work out a clever options trade you can use to bet on additional weakness.
Underdog stocks for sale: PayPal (PYPL)
Distance from summit: -43%
PayPal could still fall a great distance despite being nearly halved. At the start of the 2020 pandemic, PYPL was sitting at $125, down $50 from here. Over the past six weeks, the daily downtrend has slowed and formed a sideways trading range. But instead of propelling up and building a convincing upside breakout, it hits hard on the downside. The $177 support shelf held out long enough for its failure to turn out to be a major failure.
If the previous support breakouts are any indication, we could see a quick drop to $160 if the sellers hold their bets. Given the higher volatility of the stock, I suggest using a spread trade rather than buying put options.
The exchange: Buy the February vertical put at $175/$160 for $4.75.
You risk $4.75 to gain $10.25 if PYPL stock falls to $160 at expiration.
Distance from summit: -56%
Snap’s collapse after last quarter’s earnings report was deadly. For a single announcement to drop the stock more than 50% in a single quarter is horrific and shows how much the street hated numbers. Prices are now submerged deep below all major moving averages.
Once again, it’s tempting to say that SNAP stock is so down that it can’t go down. But as PayPal was fine, path lower before the pandemic. Shareholders are hoping the February 3 quarterly report will save them. For now, I think the downtrend continues. Prices have come down a lot in the past three days, so if you want to wait for a bounce before entering, do so.
The exchange: Buy the February $37/$32 vertical sell spread for $1.90.
You risk $1.90 to gain $3.10 if SNAP drops to $32.
Underdog Stocks For Sale: Adobe (ADBE)
Distance from summit: -26%
Adobe completes today’s hat trick of stocks for sale. Admittedly, it has held up much better than its predecessors, but it is still in bearish territory and has a daily chart that looks gloomy. It’s been a behemoth stock for the past decade, and every drop has eventually been bought. But the current one looks different for two reasons.
First, this is the deepest we have fallen below the 50 week moving average all time. Second, growth stocks are arguably more hated today than during the last corrections.
Thursday’s reversal triggered a further decline and prices are expected to fall below $500. Don’t let Adobe’s high stock price put you off, either. We can build a cheap options spread.
The exchange: Buy the February $520/$500 vertical put for $8.45.
You risk $8.45 to gain $11.55 if ADBE drops to $500.
As of the date of publication, Tyler Craig had (neither directly nor indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
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