While the Nasdaq and S & P 500 have been soaring for over four months, cracks are beginning to show in some of the tech darlings. Take Palo Alto Networks (PANW) , for instance. It experienced a whopping 60% surge from November 2023 to February 2024, riding high on the AI and tech bubble wave. However, despite surpassing earnings and revenue expectations last month, the stock plummeted a staggering 30% in a single day after revising down its guidance for 2024. As is often the case with such movements, stocks typically retrace a portion of the drop before resuming their original trajectory. That’s precisely what’s occurring with PANW. What the charts say In the chart provided, I’ve utilized Fibonacci retracements to illustrate this phenomenon. These retracements are a crucial component of Elliott Wave Theory, with the 61.8% and 38% levels being particularly significant. It’s worth noting that PANW initially recovered some of its losses, but it’s facing strong resistance at the 61.8% level, resulting in rejection. Based on this analysis, my outlook is bearish for PANW, anticipating further declines from here. With this view in mind, I am looking to place a small bet against the tech sector using PANW as my primary trading vehicle. The Trade Setup: PANW 305-300 Bear Put Spread The trade structure I am using here is called a “bear put spread” also known as a “put debit spread”. To construct my bear put spread, I need to buy a $305 put and sell a $300 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: Bought $305 put, Mar. 22 expiry Sold $300 put, Mar. 22 expiry Cost: $250 I have used $305-$300 as my strikes since PANW was trading at $301 at the time of writing this article, but strike selection will depend on where PANW is trading when placing this trade. Eg. If PANW is trading at $298, I would open a $300-$295 put spread instead. If PANW is trading at or below my short strike on expiration date, this trade will double my money and return a 100% ROI on money invested. As soon as I get filled on this trade, I can place a GTC (good till canceled) closing order for $4.85 on this trade. That way, the trade will close on its own when it reaches its full profit target. I like to close profitable trades around 94% ROI. This helps avoid waiting until the last few days of expiration week, thereby reducing gamma risk. If the trade goes against me, I would want to get out of the trade if I lose 50% of my initial 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.
