Tuesday, April 15, 2008

Pioneer Trade: HAL

I usually do not short extended stocks unless I see a major divergence signal or at least one distrubution day. However, I decided to take a small short position in HAL today.

Technically, the stock still looks great and there are no major divergences. The 52 week high in price is confirmed by RSI, OBV and stochastics. So why am I making an exception to my "don't short strong momo stocks" rule?

The answer is the stock has gone too far without a pullback, is now extremely oversold, and significantly above the 50 day moving average. I recently researched momo stocks going back six years and found this is a good, quick short opportunity.

Looking at this stock over the past year, when it does make a run it lasts 8-10 points (see May, August and February). The stock has currently run up about 10 points. I see a pullback in its future.

Note that I don't go "all-in" with this setup. I use a small position size with tight risk management. For this trade, I went short 200 shares at $44.83. My stop is in the $46-47 range with a target of $40. This gives me a reward to risk ratio of 2:1.


4 comments:

Joe said...

Why do you have MON in the short setup? Isnt it forming somekind of W? Or are you looking at a potential for triple top?

Eochaidh said...

Interesting play on HAL. Im wondering why your target is so far below the possible resistance around $42. Also, there appears to be an inverted head and shoulders pattern confirmed with neckline just around $40, could that be where your target comes from? Finally, did you hold CSX into results?

carmichael said...

I felt the same way about POT but my shorts killed me.

The Market Speculator said...

Joe--poor volume pattern and diverging obv. I'm not necessarily anticipating a price pattern as I am noticing volume is not confirming the move. This leads me to believe the stock will pullback.

Carmichael--Pot is not quite as extended as HAL. A 20 point move in a $185 stock is not the same as a 10 point move in a sub 50 stock. POT would have to move another 15-20 points higher to reach the "extendedness" of HAL.

Eochaidh-Hal target is based on the breakout at 39-40.