We highlighted on Tuesday how the stock market seems to be stalling out after a face-ripper rally in November. I’m putting on some bets against the tech sector via various proxies. I am using the tech-heavy Invesco QQQ Trust (QQQ) to come to this conclusion as the ETF started stalling around $400, which is an area of resistance. You can also see that the price candles are turning around and forming lower highs and lower lows for the past week. Although this doesn’t confirm a bearish move yet, it does show loss of upward momentum. If the tech sector cools off, most of the stocks in this sector which have a followed the same trajectory in November will also tend to pull back. On Tuesday, I highlighted a bet I’m making against Netflix. I’ve found another tech proxy showing signs of staling, this time from the chip sector in Analog Devices (ADI) . If you compare the QQQs to ADI, you will notice that ADI follows the price movement of QQQ very closely. To confirm my bearish bias on ADI, I am using two technical indicators: RSI (Relative Strength Index): When RSI moves touches or moves above the 70 line, that means the stock is overbought. Once overbought, a trader needs to wait for the stock to drop below the 70 area for a bearish setup to form. In the case of ADI, RSI did touch overbought zone on 11/17 and has been declining ever since. MACD (Moving Average Convergence/Divergence): I am using another popular indicator called MACD. The yellow line is the signal line and the blue line is called the MACD line. When the blue line cross above or below the signal line, this can be used as a trend change indicator. I have shown 3 instances in the past, where MACD has generated very reliable signals for ADI. As of today, MACD is flagging another reversal signal with the blue line almost about to cross the yellow line. The trade: ADI $185-$180 Bear Put Spread With a bearish directional bias in place, all I need to do is find a suitable options structure to take a bearish trade. The trade structure I am using here is called a “bear put spread”. You may find trading platforms using other names like “put debit spread” or “long put spread” but they all mean the same. To construct my bear put spread, all I need to do is buy a $185 put and sell a $180 put as a single unit. Most trading platforms will offer a bear put spread (or long put spread) as a trade type and automatically construct the trade for you. All one needs to do is make sure that they pick the right strikes and expiration dates. Here is my exact trade setup: Buy $185 put, Dec. 29 expiry Sell $180 put, Dec. 29 expiry Cost: $2.50 I have chosen Dec 29 th as the expiration for this trade which is 23 days away. But depending on how aggressive I am on my directional bias, I could have easily chosen Dec 22 or Jan 5 for this trade as well. Closer expirations will give you less time to be right. Profit target If ADI is trading at $180 or below on expiration date, this trade will double my money and return a 100% ROI on money invested. Note that ADI is already trading at around $182, so I need it to move just a couple dollars in my direction for this trade to be profitable. Managing losses On the other hand, If ADI starts going up and crosses the $185 mark (i.e my long strike), this trade will start showing losses. I will want to close this trade if at any point during my expiration window I lose 50% of my investment (i.e $1.25). By simply doing this, every winner will cancel out two losing trades. -Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
