Thursday, August 23, 2007

Shorting Momentum Stocks: the GRMN Trade

Those of you familiar with my trading style know I rarely short high flying stocks. While it seems logical to go against a stock that is overextended, this type of trade generally takes on too much risk. Stocks tend to trend longer than they "should" due to market psychology and short squeezes.

However, there is one contrarian setup that I do use on momentum stocks. A stock that reaches it's high, without RSI and OBV confirming the move, gets my attention as a short play.

Take a look at the GRMN chart. During the last high, OBV and RSI levels were higher than they are now. This "negative divergence" is a sign that the stock is not ready to rocket to new highs.

A negative divergence is not enough to jump in. We also need to see a failure at the old high level. We've got that here with GRMN. The stock stopped right at $105 and has pulled back.

The last piece of the puzzle is volume. Volume patterns in this stock are not bullish. We've seen more volume on the downside than upside. This was enough to get me in as a short today.

I went short 100 shares of GRMN at $102.65.

Note that I am not making a big bet here. I took a small position and my stop is above the old high at $105.50. I am risking less than $300. It's never a good idea to make big bets against the trend.


carmichael said...

I think I see a double peak pn my 150 day chart. I'm thinking about shorting at 105. I tested the waters at 102.75 but got stopped out at 103 .75 only a 50 dollar loss. Do you not see the possibility of a double peak?

The Market Speculator said...

Based on volume, I think a pullback is more likely than a breakout at the $105 level. However, this has been an incredible momentum play, so you never know.

A double top is a possibility, with a target at the mid point's bottom, which would be $90.

I will stay short until my stop-loss is hit at $105.60.

carmichael said...

Thanks for your input, GRMN will have all my attention on monday. I'm just scouring over any other technical indicators other than the ones I found which are the exact ones you listed.