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Short The Weak - A Current Example!

Posted by Pete Stolcers on August 12, 2006

In this option trading blog, no consideration has been given to your suitability for this trade. It is intended for educational purposes only.

1. First you have to get a feel for what the SPY has been doing. For the last 5-days, it has been relatively flat with a $.50 change for the week.

2. This is a 5-day chart of LAMR. Notice how it gapped up 4-days ago and it has been drifting lower all week. In fact, that day it had an intraday reversal and closed down for the day. Look at what the stock did the next day. Reference the two red boxes. The market gapped higher and the stock could barely rally. By the end of the day, the market was unchanged and the stock was down. Then, Friday the market was flat and the stock declined steadily to finish near its low of the day.

3. In the last chart the relative weakness is obvious. This stock is in a very orderly down trend. It has not been able to poke above the 20-Day EMA. The company posted weak earnings Tuesday – hence the gap and reversal. This stock had EPS of $.18 and analysts expect it to make $.52 this year. With revenue growth of 8% and a forward P/E over 90, this looks like a short.

Be prudent. This stock appeared in the Daily ReportThursday.

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Posted in Relative Strength/Weakness - My Edge.

Option Trading Comments

  • On 08/14, Mike said:

    That’s a great educational piece. Once thing I noticed, though, which prevented me from getting into that trade Friday, was that it had been down six consecutive days already, the RSI had hit 30 where it bounced twice earlier, and Stochastics were near their lowest point in the last few months where a bounce usually took place, and there is a huge short interest in the stock (over 12 days to cover). <br>sure enough, it bounced with the market today (score one for this idiot reader). What’s interesting, Pete, and what plays with your analysis, is that so far (3pm) the stock has sunk after hitting resistance at its declining 10 dma. That’s what gives me the confidence in the trade--and proves you know your stocks! Thanks again.

  • On 08/14, Pete Stolcers said:

    Hi Mike, <br><br>Great points. This one deserves to go on a "weak" watch list - nothing more. A failed bounce to the 20-Day EMA would set up a nice entry, or if the market falls apart and this stock joins in, that would be another reason to jump aboard. Now that it bounced and held the gains while the market reversed, watch and wait. It did have news today. It announced a subordinated debt offering today to pay off bank creditors. Not anything that would normally be material news. The broker dealers (BDs) doing the underwriting were no doubt supporting the stock today. Tough to get subscribers to a subordinated debt offering when the stock is tanking. If this is all the rally they can muster it means the sellers are ever present. The BDs won’t stick their neck out too far. They realized they could generate some short covering today. If this is all the upside it can find, it won’t take long to resume the slide.

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