Tuesday, February 07, 2006

Fantasy Island

If anyone needs proof of how stupid I am, look no farther than the fact that I regularly tout one of my boss' favorite stocks as a short position. I'll try to position this as proof of my objectivity as opposed to my daftness.


The stock in question is NTRI (NutriSystem) which has lost 25% of its value in the past four days (to be fair, it went UP thousands of percent beforehand - - this was a $1.60 stock only 15 months ago).

I've mentioned this stock a few times since it broke its trendline and "kissed" the underside of the trendline (see the arrows in the graph below).

But what's really interesting about this stock now is the bearish island reversal. An "island" is basically a series of prices which are flanked by two price gaps. So it looks like a clutch of price bars just floating in midair (or, in a bullish formation, floating down below the chart). Take a look:

Islands are VERY rare, and they are also VERY strong reversal signals. This stock had a very fast, very steep runup, and frankly I don't know what to suggest as a place to take profits. I don't see any strong support for a long way down.


elduque said...

OK. I was short NTRI and then was forced to cover when It created the island reversal. How do you handle being forced to cover and then having the stock drop like a rock?

Or are you able to stay objective and reposition the stock at a lower level.

I just find that a very hard trade mentally to make.

Your comments are welcome.

Tim Knight said...

In this instance, the way to do it would be to set your stop price to a level just above the trendline. In other words, set the stop so that it's triggered if the price makes its way to the other side of the trendline (which means that it's blown through resistance). In this instance, you would not have been stopped out (although it would have been painful for a few days!)