NLST is looks like a good short opportunity. This post is somewhat academic for me because there currently are not shares available to short. Here is how I have mapped out the trade.
RSI is almost at 94. This stock is way way overbought. However, it plowed right through resistance at $2.79 meaning the next stop is at around $4.43. I’m not sure if it has enough juice to test the next resistance level, but it is certainly could. I find it extremely unlikely that it can test the 50% retracement level at $5.76 without some momentum burn.
My goal is to set a stop above $4.43 so that I don’t get knocked out if the stock protrudes a little bit over that area of resistance. I think a good stop would be around $4.7 [EDIT: My stop is at $5.10]. I’m willing to use a $1 stop which is a little less than 3x the 10-day ATR of $.40. I’m therefore looking for an entry in the $3.65-$4 range.
In terms of mapping out the exit, the hope is to get a big drop within days of the explosive rally. The worst case is actually not a move higher because that just adds to the likelihood that the stock has a big tumble. The stop should be wide enough to take on another up day. With this kind of momentum behind the stock, another double digit up day immediately after this kind of move is very unlikely.
The worst case is you get a Revlon type scenario where the stock sells down only 2-4% after the big move up. RSI pulls back into the 80s and you are left with a tough decision of whether to hold it for more downside or whether to take the risk that it moves higher. The answer is that you close your position. Why? Because the 2-4% pullback provides a lot of momentum burn and makes the probability quite a bit higher that the stock can have another double digit up day.
UPDATE: NLST is trading at $3.80 right now. I think the stock has a decent shot of trading up to $4.43. RSI is at 94. I really hope shares become available. I would be very satisfied with an entry in the $3.8-$4 area. That would give me plenty of room to work with if it tests the 38.2% fib level ($4.43).
UPDATE2:
Shorting momentum is never easy. It looks like that gap from May of 2007 is resistance. It traded up to the gap but couldn’t fill it. Closed right near the 38.2% which does not come as a surprise. I like the distribution into the close. With RSI at 95 and resistance tested, I like the setup.
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chartsandcoffee
