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Investing, Stocks  | November 8, 2019

In a world where stock indexes are marching to new highs daily, bullish-leaning articles are en vogue. But today we’re taking the road less traveled and spotlighting three software stocks to sell. Or at least stay away from. Their charts are deteriorating and have the bears’ paw prints all over them.

Three months ago, software stocks were the belle of the bull market ball. Their fundamentals flashed high growth rates and their charts showed massive momentum. But the tides have turned, the red-hot enthusiasm has cooled. What’s particularly unnerving is their inability to recover amid a backdrop that has become increasingly favorable toward stocks. The past month has seen the S&P 500 power through resistance with a consistent run of record-high closes.

Meanwhile, software stocks are languishing near support, vulnerable for another round of breakdowns. Here are three of the weakest-looking components.

Shopify (SHOP)

Since peaking at $409.61, Shopify (NYSE:SHOP) has fallen 37%. The reversal has carried SHOP stock below its 50-day and 20-day moving averages, both of which are now pointing lower. We’ve seen multiple recovery attempts, but sellers sit heavy overhead and have squashed each one. With this week’s drop, SHOP is now testing support near $290 for the third time.

A breach of the floor could signal the next leg of the stock’s descent has begun. You have two choices: First, steer clear of bullish trades until SHOP can climb back above the 50-day at $330. Or, second, enter bearish trades to capitalize on additional weakness.

The high price per share and lower implied volatility make bear put spreads an intriguing idea. Buy the January $290/$280 put spread for around $4.

Veeva Systems (VEEV)

The rollover in Veeva Systems (NYSE:VEEV) has mirrored Shopify with is glorious gains of the first half of 2019 being dismantled day-by-day. Fortunately, the magnitude of its losses hasn’t been as significant as its predecessors. Thus far, VEEV stock is 20% off its highs.

The posture of its moving averages looks worse, though. Unlike SHOP, VEEV has already fallen below its 200-day. Over the past few months, a descending triangle pattern has formed that is now on the verge of completion. A break of $138 will complete and confirm the bearish setup.

If support gives way, then buy the January $140/$130 put spread for around $4. Your risk is limited to the initial cost, and the reward is $6 — which gives you the potential for a 150% return.

Workday (WDAY)

The downtrend in Workday (NASDAQ:WDAY) is arguably the most established of the three. WDAY stock shattered its 200-day moving average in late August and hasn’t looked back since. While the previous two candidates were sporting breakdown setups, Workday is offering a bear retracement pattern with clean entry, stop, and target levels.

To confirm the rollover, wait for a break of Tuesday’s low at $159.47. The first downside target is $150. If WDAY breaks back above the 50-day moving average at $169, consider stopping out.

Bear puts are once again my strategy of choice here. Buy the January $160/$150 put spread for around $4 if the stock triggers. The risk and reward will be similar to the VEEV trade idea.

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