One of the challenges in trading is in determining an entry for a new stock position (whether it be long or short). There are a variety of methods followed by traders:
- a moving average test
- a horizontal support line test
- a resistance line test
- RSI over-bought or over-sold breach (70 or 30)
The above are just a few of the many triggers that could be used.
When a stock is “extended” – meaning price has moved away from a moving average like the 50 SMA – or a base it has built – the most logical approach is to look for a short entry. To illustrate how this works, I bring you the weekly chart of $AMCX that shows how an RSI trigger in the past would have worked for those that shorted it:
The boxes show the areas where the RSI trigger would have got you in short. You would use whatever Stop settings as part of your trading plan. I have also noted here how the MACD has got extended as well. One reminder here, over-bought can stay over-bought for a while so that is always important to keep in mind.
Up to this point, this looks like the higher probability trade is to start a short. This could be a simple short on stock, it could be the purchase of Puts or a Put Spread, and could even include a Short Call or Short Call Spread trade.
Now to really mix up the thinking here. Here is a PnF chart:
Options are thinly traded and have wide strikes so it is hard to recommend any particular trade. Here are a few ideas if you trade with wider stops:
- Go long the stock here and buy the May 60 Put (current bid/ask is 1.35/1.65). If the trade goes in your direction, find a good stall spot to sell premium against your position to recoup some (or all) of the cost for the Put.
- Go short the stock here and buy the May 65 Call (current bid/ask is 1.75/2.05). If the trade goes in your direction, find a good stall spot to sell premium against your position to recoup some (or all) of the cost for the Call.