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Stock Option Type Stock Option Class Option Trading Setup

BDCE – Trend
BDRE - Greenline
EDRE - Redline

Stock Option Setup

EDRE Bearish, Day, Reversal, Early Trend

This search identifies stocks that have recently rallied and are now reversing lower on an expanded daily range. Read all of the tutorials to get a feel for what you should be looking for and then view the symbols to find stocks that conform to this Set-up.

Stock Option Setup Search Criteria: Redline

• The average daily range has expanded recently.
• The average daily volume is greater than 300,000 shares.
• The stock has opened near its daily high and is trading near its daily low.
• The stock has traded higher the last 10 days relative to the last 30 days.
• The stock has traded higher the last 5 days relative to the prior 10 days.
• The last trade is lower than the 5 day low as of yesterday.
• The stock is currently trading below yesterday's close.

This stock is forming a significant Redline today. The Redline is the result of an open near the high and a last near the low. From a relative perspective, the longer the body the more significant the move. Note how this stock has been trending lower in a choppy fashion.

The trade is considered early because it has not confirmed. In order to confirm, the stock should close near its low of the day and preferably penetrate a support level. In some instances the results will show stocks that are down big. Use caution since a trade below support does not constitute a close below support. As the end of the day approaches, it will become apparent if the stock will close near its low and/or confirm. This is a nice reversal trade because the reversal allows us to join the longer-term trend lower.

If we take a closer look, we can clearly see the support and resistance levels. Until 10 days ago, the stock was in a nice downtrend. It based for a few days and then had a big up day (Greenline). This could have been news related, or it could have simply been a short covering rally. In any case, the rally lost its steam and left us with a reversal opportunity. If the stock closes near its low today it will have breached the 8-day low, and it should be shorted. A protective stop should be placed at the blue horizontal resistance line. The lower horizontal support level represents our price target.

These trades are considered Day trades because they are reversing a recent short-term up trend. In some cases, the only sign of a reversal is the weakness of the current day. You will see some candidates that have made very large moves of 10% or more in one day. These trades are usually very effective, however, it is often best to wait until the next day to see if any of the move is given back on the open. Once the stock stabilizes and resumes its drop, initiate a position. Often a longer-term chart will help you gauge the strength of the stock.

This is a weekly chart, and it shows that the stock is range bound. Choppy stocks make good reversal candidates. Seemingly every decent move is met with a counter move. When you are initiating a short position, it is important to look at a long-term chart to make sure that you are not betting against a strong stock that is in a strong up trend.

This stock has frequently visited the blue support level and there is a good probability that it will test it again. We are looking to profit from that move. Within 3 days your position should be reduced to at least half its original size. Remember, this is a momentum trade, and we are interested in quick results.

Notice that his stock has also reversed a recent rally. The Redline today has moved the stock through a short-term support level that has been formed over the last 3 weeks.

This stock does not know what it wants to do. The large drop and subsequent rally tells me that there is a great deal of indecision in the stock right now. That greatly reduces the predictability of the trade and it increases the risk. A short position at this juncture only has a short distance to travel before it hits support. When you compare that profit picture to the magnitude of the recent rally, another price spike could lead to devastating loses. This trade has a very weak risk/reward profile.

Example of a Bad Stock Option Trade

This is a weekly chart of the stock, and it tells a much different story. This stock is in a nice (but choppy) up trend and it has recently made a nice breakout. The stock lost some of its steam and it is now testing that breakout level. If you measure the distance to the support level against the distance to the high, you can clearly see that the potential risk is much greater than the reward.

This stock is very volatile, and it is difficult to tell what it will do next. It looks like it will resume its rally, but that statement can't be made with confidence. In these instances, avoid the trade and look for a more predictable situation.