I am constantly on the lookout for new trends and patterns in trading. Years ago a colleague of mine found a powerful pattern that served to bring some nice gains – after it triggered.
After studying and back-testing, I found that stocks that trade in price 100% above the 200 moving average (on the daily chart) tend to lose gravity and run much further than expected. It’s a simple criterion. When this happens, there is no rhyme or reason for a stock to move higher, some will say shorts are getting fried. I suppose this is part of the reason. This is the ultimate for an options buyer, stock price moving with some explosive velocity beyond a strike creating enormous gains.
Each day there is a list of names that hit this criterion but not all of them are actionable. As you might expect, low dollar stocks (under 2 bucks) hit this quite frequently. I ignore them. But when a higher dollar name makes the list, especially for a first time, I take notice.
Take a look at recent high flyer Tesla. This stock has been on fire since earnings but then it really broke out just following.
Was it time to get in before earnings?
Sure, it was a good time and made for some excellent gains, but take a look at the chart and see where it has gone since leaving its gravitational pull behind.
The area marked on the chart shows where decent entry points could have been taken. The high at 95 the first time around corrected about 10%, anywhere the play could have been made as it never lost the pattern!
I can’t tell you how much profits were made on this play but suffice today, the recent move from 85 to 111 happened with lightning speed and efficiency. Option gains in just over a week were well into the triple digits for at the money or out of the money plays.
To be fair this is not a condition you’ll find often – it’s a rarity with high dollar stocks and does not last too long, but suffice to say nice gains can be made.
In fact, the list of high dollar stocks meeting this criterion is quite small. Do you remember Taser about 10 years ago? Or Apple just last year? Yep, even the mighty Apple lost gravity when it first hit 600, then on to 700.
Back in the late 90’s the list was showing so many names – and as you know the Nasdaq was up an enormous amount into and through 2000.
Keep your eye out for these kinds of reliable patterns. They are not perfect but certainly provide some solid gains for an options trader.
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