Market Backdrop
The market is quiet at the end of August. The VIX is down, and the S&P 500 feels barely awake. This is unusual because late summer into September is often a very volatile time of year. A quiet September is rare, so heavier volatility is likely close. Retail traders should get ready and may want to buy some volatility now. Inflation data came out this morning.
All three trades below are bearish, done as out-of-the-money put spreads. Buying an out-of-the-money spread is a cheap way to bet on a drop.
Coca-Cola (KO) - Bearish
Coke (KO) is up about 31-32% year-to-date, which almost no one is watching. It has moved more in the last couple of months than in whole previous decades. Valuation and fundamentals do not explain the run. The cause looks like rotation into a safety trade: as money leaves semiconductors, buyers feel safer in old-school names like Coke.
I am fading Coke with a lot of duration. Out to the December 18th options expiration, about 114 days away, buy the 85 puts and sell the 75 puts against them. This is a $10 wide put spread for a $1.25 debit. Coke does not have much volatility. This trade needs Coke to pull back to about 75 within 114 days. Even at 80 the trade is fairly profitable.
Technicals: 85 is the first target line; the break-even is roughly 84, around where the earnings gap opened. 75 is the full downside target. The 38% move off the lows stands out for a name not known for big swings. The recent high was 92.49. After a pullback yesterday, today formed a bearish engulfing candle - a large red candle that fully swallowed the prior day's smaller green candle's body. Bearish follow-through tomorrow would confirm the pattern. The shape is a rising wedge (two upward, converging boundary lines), usually read as bearish; a break below the white trend line would confirm. The 21-day teal EMA sits at 88.37, closest to the boundary line and worth watching for a break. Price is slipping below the 5-day EMA (one week), which comes in just short of 91. RSI is pulling back, still bullish but out of overbought (above 70). The green trend line still holds. The volume profile shows a small node near 86 to 88 formed after the earnings gap up, a possible last support if price fades. Coke traded at 90.53, down more than 1% on the session.
Adobe (ADBE) - Bearish
Software has beaten semiconductors by a wide margin over the last couple of weeks. Microsoft (MSFT) has a bid back under it; Salesforce (CRM), SAP (SAP), and Adobe (ADBE) are all strong. Adobe has run from a recent low near 190 back to about 280, a 46% move straight up from the bottom. This looks like low-hanging fruit for sellside activity: the move is not backed by fundamentals or technicals, so a return of selling is likely, and the pullback could be violent. Earnings are coming up, and this trade rides through them.
For the September 25th expiration, buy the 260 puts and sell the 255 puts against them - an out-of-the-money put spread for a $1.30 debit. Anything under 255 wins on the trade. Earnings land September 10th, inside the trade window.
On the AI fear: worries that generative AI will displace Photoshop may be overblown, because anyone who needs generative AI to make an image probably was not using Photoshop in the first place; Photoshop is more advanced software.
Technicals: Adobe is up 20% over the past month but still down over the last year, 27% below the highs near 370.86. The setup is a rising wedge between two white lines, which suggests anxious buying but firmer selling, shown by the gentler slope of the upper boundary. Price failed to overtake previous highs at the red line near 275, a possible double top that also matches a previous low near 285. Downside footholds sit at 251 and 241. Moving averages are mixed: the 251-day EMA (one year) is just above price near 285, while the 21-day EMA is near 262; a strong push below 262 would be notable for the bearish case. RSI has a triangular shape and is still bullish; watch for a break below the green line and the 50 midline. The volume profile shows a node from 237 to 260, with the point of control (heaviest trading) near 246, to the downside. Adobe traded at 270.85, down more than 1%.
Tesla (TSLA) - Bearish
A few weeks ago I was bullish on Tesla (TSLA) as a trade, and that was correct. Now Tesla got its groove back too far, too fast, and a near-term pullback looks likely. This is a shorter-duration traders' trade, not a long-term view.
The stock rebounded from 300 to 360. Tesla is in a strange stretch with a lull between products. The Cyber Cab is not really a retail product; they are testing them heavily in Arizona and they are everywhere. Tesla discontinued the Model S and Model X and is gearing up to build robots. Investors have shifted some attention to SpaceX and off Tesla. A decent-size, quick, violent pullback in the near term is warranted; the stock has run in a perfect upward channel, and today could start the pullback. Tesla is a wild child that is hard to read a few months out - much like Elon Musk himself.
For the September 18th expiration, buy the 340 puts and sell the 335 puts against them - a $5 wide put spread for a $1.90 debit.
Technicals: The channel held until today, with price now slipping down about 1.8%. The push up came from the 52-week low of 297.38, leaving price up about 15.6% from there. Recent relative lows to watch on further downside: 331, 323, and 315. Upside levels: a notable low near 364 that matched the recent high, and the earnings gap down that began at 373. Moving averages look the most fragile of the three trades - price is on the verge of breaking the lowest one, the 21-day teal EMA, a bit below 344. A move lower would open the door to testing those horizontal support lines. On RSI, the green trend line is broken and price is slipping below the 50 midline, a doubly bearish momentum signal lining up with the price breakdown. The node here is 342 to 356. Below 342 there is little to break the fall, so beware of faster-moving prices on a decline. To the upside, activity picks up near 392. Tesla traded near 343.52, down close to 2%. The Cyber Cab unveiling is set for Austin on September 3rd.
Key Takeaway
A trade is different from an investment thesis. All three positions here are short-term bearish bets on names that have run up hard, played through cheap out-of-the-money put spreads rather than long-term calls on the companies.
