Wells Fargo & Co (NYSE:WFC) is all set to report first quarter results next week. And according to one top trader, the stock looks weak ahead of the event.
Shares of Wells Fargo are down 14 percent year to date, compared to a mere 1 percent dip in the S&P 500 Index.
Wells Fargo Stock Technicals Paint a Grim Picture
“I like to short weak stocks…(and) I think Wells Fargo is ready for the next big leg down,” Todd Gordon, founder of TradingAnalysis.com, told CNBC.
Looking at a daily price chart of Wells Fargo, Gordon said that shares have reversed from the strong resistance around the $50-mark. “It looks like we could go down and test the February lows (of around $45)…especially after earnings on April 14.”
To profit from this bearish outlook, Gordon has bought the April 47/46 put spread. This option spread strategy is created by buying and selling an equal number of put options simultaneously. The trade will turn profitable if the underlying stock, which in this case is Wells Fargo, falls to $46, within the next fortnight.
“If we are right in the direction, we make money. And if volatility increases – especially with an event like earnings – that will (further) increase the value of our spread,” Gordon noted.
Wells Fargo will be among the first of the major U.S. banks to post earnings. The average analysts’ estimate is for EPS of 98 cents on $21 billion in quarterly revenue.
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Broader Markets Also Seem Tired
Adding to the bearish case for Wells Fargo & Co (NYSE:WFC) are signs that the broader markets may enter a phase of correction.
“We are at a serious overbought extreme. Within the S&P 500, over 93 percent of stocks are above their respective 50-day moving averages,” Michael Gayed, Chief Investment Strategist at Pension Partners LLC, wrote on MarketWatch.
“From the standpoint of probabilities, odds don’t favor the bulls…leading indicators of volatility are sending warnings, and price action in the broader stock market has hit extreme levels.”
Another worrying sign is the growing divergence between the Dow Jones Industrial Average and the Dow Jones Transportation Average. The lesser-known Dow Index is widely regarded as a leading market indicator, and since last month, has lagged the Dow industrials.
David Kostin, chief equity strategist at Goldman Sachs, agrees the near term outlook isn’t too promising. “Core earnings are likely to be muted. So there’s an absence of drivers for why the market goes higher.”
The S&P 500 ended last session at 2042. A close below 2035 could further accelerate the sell-off.