Picking a Top

Today I post a few charts on a trade I am prepared to put a position on. To short the stock BIDU.

Before I just go short the stock I went and did some research. I wanted to avoid as much technical analysis jargon as possible and apply a simple chart pattern. The pattern I am looking for is a daily upward gap followed by a second up day. There were two stocks that had similar upward gaps on a intraday chart that I have followed for quite some time. The charts are AAPL, Apple and AMZN, Amazon.


The day AMZN gaped up was the day they posted earnings. The following day the stock manage to gain even more. Considering the first day gap was a new high for the stock I am betting that the second day rally was due partly by shorts covering. Although there was a sense of optimism in AMZN for blowing out expectations so there were also significant buyers. The days after the stock consolidated AMZN still dropped about $5 in the consolidation. A good time to short the stock was on the third day after the gap day.

In AAPL on October 19, 2009 the stock spiked at the open. It ended the day closing lower but the following day it again increased at the open. The stock ended on the second day at pike high. The third day the stock was neutral and then declined on the fourth day. The decline was pretty dramatic, over $10 drop in a week. Again it looks like a lot of shorts getting squeeze on the second day after the upward gap. What is interesting to note is that Oct. 19 was a Wednesday and option expiration was on the 21st. 21st was actually a neutral day for AAPL, it ended without gaining much.

As I write this post BIDU is at a 52 week high which is dangerous for people who are shorting. The main reason is because when a stock has past its previous highs there are very few traders that can preciously judge how far higher the stock can go. (Trying to pick the top is very difficult.) Furthermore traders who have been shorting the stock at its former high may begin unloading their position to avoid heavy losses. For the past two days a similar pattern has occur in BIDU as in AAPL. The first day BIDU opened with a huge gap on Wednesday of options expiration week. The stock price ended lower than where it gaped at the open. However a continuation upward trend continued on the second day. Presently the stock is up 5%+ at about $463 and change. Over 80 points swing in two days, impressive.

Due to such an impressive run I do not plan to play any Jan10 options. The stock just has to much of a upward momentum. To be safer I am concentrating on deep in the money put options with Feb10 expiration. If chart pattern in BIDU is similar to AAPL than I expect BIDU to consolidate downward in the week to follow. Will check back on this prediction.