Use options to profit from H&S reversals
SanDisk
(
SNDK |
Quote |
Chart |
News |
PowerRating)
has had a heck of a year, running from near
$20/share all the way up to $65 in a little less than 11-months as it rallied
along with Apple Computer
(
AAPL |
Quote |
Chart |
News |
PowerRating) and other companies utilizing flash memory
technology. Of course the big run is over now, and the stock has pulled back to
around $50 after a couple of downgrades and a natural end to the massive
short-squeeze that took place on the stock.
Unfortunately for SNDK shareholders, there are
signs that this may be more than “just a pullback”, and that SNDK may have
another large move to the downside in its future.
Looking at the one year chart of SNDK, you can
see the big run the stock had after its initial breakaway gap above 24 this
summer. You can also see that SNDK may be in the final stages of completing a
head and shoulders formation–typically indicating a reversal in trend and
potentially spelling bad news for the stock.
The “neckline” for SNDK’s formation is right
around $45.50/share. If SNDK can hold above this price and eventually make a new
high, the bullish patterns continue. On the other hand (more likely), if SNDK
falls through $45.50 on decent volume, the neckline will be broken. This price
action would confirm the head and shoulder reversal and indicate a strong
likelihood of a new downtrend emerging for the stock.
One of the best ways to play unconfirmed head and
shoulder reversals is through the use of straddle or strangle options spreads as
the stock approaches the neckline. By entering both a put and a call option at
the same time, you profit from a large move in either direction–which is
extremely likely if SNDK starts to test the $45.50 neckline.
Andy Swan
Andy Swan created and
co-founded DaytradeTeam five years ago on a principle of empowering
individual stock and options traders with the techniques and analysis methods
typically reserved for elite professionals. His expertise in technical analysis
and commitment to educating members earned DaytradeTeam a top-ranking among
advisory services for several years.