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The liquidation in growth stocks reached a fever pitch this week. On the index level, the Nasdaq is the poster child for the pain. From peak-to-trough, its retreat measures -8%. But even that masks the wholesale destruction beneath the surface. For the epicenter of the fallout, cast your eyes on the ARK Innovation ETF (NYSEARCA:ARKK), which has fallen nearly 40%.
ARKK houses the bubbliest of all growth stocks. The lot of them were uniquely positioned to profit from many of the themes that arose from the novel coronavirus pandemic. Shareholders bid their prices to the moon, creating sky-high multiples in the process. Unfortunately, this year they’re all witnessing the downside of momentum.
With so many support levels broken and overhead supply looming large, rallies for ARKK and its constituents are suspect. Here are three of the most vulnerable to further downside:
- Tesla (NASDAQ:TSLA)
- Square (NYSE:SQ)
- Twilio (NYSE:TWLO)
Let’s take a closer look at each chart and map out a trade to profit if the weakness continues.
ARKK Stocks to Throw Off Your Ship: Tesla (TSLA)
Tesla is the largest holding in the ARKK fund and thus accounts for more of its performance than any other stock. Its price trend turned lower in February, and short of one failed recovery attempt in April, it’s been bearish ever since. With this week’s whack, TSLA is now testing its rising 200-day moving average for the first time since last March.
Horizontal support is also coming into play at $570, adding further significance to the test. If we break here, a swift drop to $500 could be in the cards. We are seeing oversold readings flashing, so ideally, Tesla will pause for a few days before the floor gives way. Options on the EV giant are expensive, so I like spreads over buying puts outright.
The Trade: Buy the July $550/$520 bear put for $10.50.
Square has developed a choppy range in 2021, making it a difficult stock to trade directionally. Its current position provides an easy spot to build trade ideas, though. Like Tesla, SQ stock is testing its rising 200-day moving average. This is a logical spot for buyers to make a stand if they are going to help the stock maintain its neutral intermediate trend.
The 200-day also sits at a key price threshold at $200. We’ve seen multiple prior selloffs terminate in this area. Friday’s 5% jump is confirming bulls are once again running to defend their turf. As long as the level holds, I’m not interested in bear plays. But if it breaks V then it’s game on.
The higher price tag makes put spreads better than long puts. I would wait for a break of Thursday’s low ($192.29) before entering.
The Trade: Buy the July $190/$175 bear put for $3 to $4.
ARKK Stocks to Throw Off Your Ship: Twilio (TWLO)
The final ARKK stock to stalk for bear trades is Twilio. Its trend reversal is more developed than Tesla and Square. It’s also still way above last year’s low, so there’s plenty of room for prices to unwind if sellers want to press their bets. The 200-day moving average already gave way, and TWLO is consolidating beneath it near $300. A few more sideways candles would be ideal to allow oversold conditions to ease.
This would also allow the current low base pattern to fully form and make a support break trade easier to play. For now, try using a break of $280 as the trigger/signal that the next downswing is beginning.
The Trade: Buy the July $280/$260 bear put for around $7.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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