16 Struggling Stocks to Buy on the Dip

Many stocks are now trading near historically bullish trendlines

Senior Quantitative Analyst
Aug 30, 2023 at 8:00 AM
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A couple weeks ago, I wrote about using moving averages to find optimal entry points for buying call options on the SPDR S&P 500 ETF Trust (SPY). I showed that pullbacks to the 80-, 100-, and 120-day moving averages presented good opportunities to buy call options on the ETF.

The very next day after that article was published, the SPY indeed pulled back to its 80-day moving average. An at-the-money call option expiring in a month (the 436-strike call expiring on September 15) would be up about 70% right now. This week, I am using the same methodology to find individual stocks that are trading near moving averages that have historically produced outsized option returns. I will highlight stocks that could generate some interesting trading ideas below.

What's In a Pullback?

My methodology for defining a pullback for stocks is nearly identical to how I defined a pullback for the SPY two weeks ago. I’m looking at data over the past five years. For a stock to signal a pullback, four criteria had to be met: The moving average had to be increasing, the stock had to be above the moving average at least 75% of the time over the past six months, the stock low had to get within 2% of the moving average, and it had to be above this threshold for at least a month prior to that signal. Then I found the stock return over the next month of trading and the return of an at-the-money call option that expired in a month.

Since I’m focusing on option returns, the universe of stocks I’m considering are those with ample option liquidity. I define an optimal moving average as one which has at least four pullback signals in the past five years, in which buying an at-the-money call option would have led to a 50% return per trade, with at least 40% of the returns positive, and at least 20% of the returns doubling. 

The list below shows stocks that have signaled a pullback over the past two weeks and are still above the moving average, but not far above it (within 5%). In other words, this is a historically bullish condition for call options on these stocks.

Stock Pullback

Next, I have a table of stocks that have not signaled pulling back to a moving average, but are sitting within 5% of an optimal moving average. In other words, they could be considered for a bullish trade.

Stock Moving Average

I also created a corresponding bearish optimal moving average signal using put options for stocks running into a moving average from below. In the current choppy environment, however, there haven’t been recent signals. The table below shows stocks that haven’t signaled running into a bearish moving average, but are close to an optimal trendline.

For example, International Paper (IP) is the first one on the list, sitting just below the 200-day moving average. When IP ran up into this moving average in the past, it led to profitable put option trades. It’s currently not a signal because this trendline is increasing, and it must be decreasing for a bearish signal. I think it’s still notable that the security is positioned just below this moving average, though, which has behaved as significant resistance in the past.

Bearish Trendlines

 

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