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Yesterday afternoon, the S&P 500 dropped over 2.5%, all thanks to low performance from some of the major tech names.
After 2021's bullish start, it's no surprise that the market is facing a pullback – and tech stocks are leading the downward charge…
And it's creating a profit opportunity for us in the process.
Today, I'm going to show you how to use "top-down analysis" to find the best stocks to play during this market pullback.
You can get a list of the top 10 stocks that are pulling back in the tech sector and the two best strategies to play them all right here…
Two Ways to Play Failing Tech Stocks
Using top-down analysis to find the stocks taking the hardest hits is literally as easy as "1,2,3."
Here's how it works:
- Start with a market prognosis (bullish or bearish).
- Find the sector that's moving the hardest in that direction.
- Find stocks in that sector that are moving the hardest in that direction.
We already know that the market is facing a pullback, which means we're looking at a bearish sentiment.
And in the chart below, you can see that over the past five days, technology has been the worst-performing sector.
In fact, the Select Sector SPDR Trust Technology (NYSE: XLK) fell 4% in just a matter of days.
This typically profitable sector is dropping right before our very eyes, but we're not done yet.
The last step is to identify the weakest stocks in the tech sector – but don't worry… you don't need any fancy algorithms or tools to find them. I did the work for you.
Below, you can see the 10 weakest tech stocks on the market:
Notice that over the past five days, Enphase Energy Inc. (NASDAQ: ENPH) dropped 18.72%.
All of the other tech stocks in this list dropped at least 8.22%.
Should the bearishness continue, these weakest stocks in the weakest sector will be the most profitable targets.
Now that we've identified the top targets, let's talk about how to play them.
I'm looking specifically at two main ways to profit on this downside.
The first is by shorting the stock.
Shorting a stock is simply selling the stock first and buying it back later. You profit if the stock drops after you short the stock.
For example, if you were to short ENPH at $165 and the stock dropped to $150, you'd make $15 per share. In this case, that'd be a 9% ROI.
Now, that's a great profit plan – but there's an even better way.
I'm talking about buying puts.
You could buy a 30-day ENPH March 19, 2021 put for $16. For 100 shares controlled, that'd be a $1,600 investment.
Now, if you were to purchase this outright, 100 shares of ENPH would run you $16,500.
Buying puts offers a much lower-risk investment.
Should ENPH drop to $50 by March, the put would be worth about $21, a 30% ROI.
Consider shorting or buying puts on any of the stocks in the list above. Should the tech sector continue its bearish stance, you'll be banking cash instantly.
Now, as the stocks I mentioned above are on the decline, one particular sector has had an incredible year so far.
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.