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Wells Fargo Stock Is A Bad Pick In A Bad Sector

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Wells Fargo (NYSE:WFC) stock is a bad pick in a bad sector. This dismal reality makes it a terrible pick for bulls, but a potentially profitable one for bears.

A Wells Fargo (<a href=

Source: Martina Badini / Shutterstock.com

Let’s take a look at the industry and the chart to understand why it’s such a deadbeat.

Banks Continue to Struggle

While many areas have fully recovered since the March massacre, financial services have not. They’re not even close: if it weren’t for energy’s miserable performance; I’d call financials the worst sector in the market.

As it stands, they are the second-worst, which is hardly an endorsement for bull trades. Banks are particularly ugly, both on an absolute and a relative basis.

Compared to the incredible momentum ricocheting back and forth in tech stocks, you have to ask yourself why buyers would even consider equities that can’t get off the mat.

The following chart highlights sector performance for the past six months:

Source: StockCharts.com

Wells Fargo Stock Chart

The weekly chart for WFC stock shows a company that never found its footing after March’s meltdown. Here we are five months later and not only has the stock not recovered, it has gone lower! To be fair, we did see a sharp jump in June, but it was ultimately rejected by prior resistance at $34 as well as the descending 20-week moving average. Since then, we’ve seen nothing but lower prices.

Source: The thinkorswim® platform from TD Ameritrade

Volume patterns aren’t helping matters much either. The past two months are littered with distribution days suggesting institutions are leaning heavily on the sell button. Instead of buying dips, they’re selling rips. And that’s not a freight train you want to step in front of.

As always, the daily view shows more detail. And it isn’t pretty. Two earnings reports have come and gone since the first quarter’s crash, and they’ve proved powerless in changing the prices bearish trajectory.

This week’s drop has carried Wells Fargo stock below its 20-day moving average, and it’s already below the 200-day and 50-day. Bad things happen when you’re south of all three smoothing mechanisms.

Source: The thinkorswim® platform from TD Ameritrade

If you’re wondering what it would take to turn bullish, the answer is a change in trend. For now, that would require pushing above $26.60, which is a prior pivot high and the 50-day moving average. Until then, building bullish trades is a fool’s errand.

Bet with Bears with a Put Diagonal

But that doesn’t mean we can’t join the short sellers. While we could play the stock directly, I prefer building a low cost, limited risk options trade instead.

The implied volatility rank is in the lower quartile of its one-year range at 23%. That suggests premiums are cheap, and long options plays are the way to go. Because I think WFC stock could continue to drift, I want to craft a position that profits even if we trade sideways.

Let’s go with a bear put diagonal by purchasing a longer-term in-the-money put and selling a short-term out-of-the-money put against it.

The Trade: Buy the Sep $27.50 put while selling the Aug $23.50 put for a net debit around $3.30.

The max loss is $3.30, but you’ll lose far less if you exit on a break above $26.60. For a profit target, shoot for a gain of $30 to $60 per spread. That works out to a roughly 10% to 20% return on investment over the next 17 days.

For a free trial to the best trading community on the planet and Tyler’s current home, click here! At the time of this writing, Tyler didn’t hold positions in any of the aforementioned securities.

The post Wells Fargo Stock Is A Bad Pick In A Bad Sector appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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