The latest stock pick from Playbook of the Week is a bearish play on HON
The below is an excerpt from this past Monday's episode of Schaeffer's Playbook of the Week, featuring Schaeffer's Senior Market Strategist Bryan Sapp, CFA. Below, Matt makes a short-term bearish case for Honeywell International Inc (NASDAQ:HON).
"My Stock of the Week pick this week is bearish. It's going to be Honeywell. The company had held up fairly well since the beginning part of this year. But we've seen some relative weakness here in the last couple of weeks. Now it's down roughly 10% in 2022. The $185- level has been key key support since the beginning of April. It was breached in premarket. There's been multiple tests here and concept I've been hammering home last few weeks is that the more than a level is tested, the more likely it is to eventually break. When key levels are broken on gaps, that is something that you need to pay very close attention to.
So we're gapping down to $183 right now and that's going to be your immediate resistance overhead. That's going to be the first line of defense for your short. We're losing the trendline from February; just look at the February lows from $224, draw a trendline on those lows and connect those to the May lows. We are now below there.
The shorter term uptrend -- I guess that we could call it that since February -- is now broken. You could expect some sort of continuation move down from here and you have some structure to trade against. Honeywell reported earnings in late April. They were good, but not phenomenal.
However, we're now trading back below those pre-earnings levels. If you have a sharp move in either direction, higher or lower after earnings, and then the stock rolls back over around If it was a sell off on earnings and takes that level out from the opposite side, then I think that's generally a pretty good sign of a reversal.
Now HON has given up that entire rally that we saw from the earnings. You could have people that were shorting against that level. And that's going to provide some resistance there when you have active market participants trading against that.
Lastly, the analysts are very bullish; six "buy" ratings, eight "hold" ratings, and not a single "sell." We've discussed at length how analysts are reactive and not proactive. So in the event that Honeywell does roll back over and the market continues to be weak, the potential for downgrades rises, and that would continue capping the factor that will push the shares down even lower.
The short trade here that I like has a stop above $190. If you want to be very, very aggressive with this, I think you can stop out on a close above $185. Given that that was that key support resistance level, I generally would want to give a little more room on my trade than that. My first target is $175. However, my primary target on this is going to be $165 and in the event that you hit it, take some profits and then leave a little runner position on for continued downside moves."
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