OSTK (overstock.com) looks like a nice long-term swing short opportunity. This
weekly chart speaks volumes to me: First off, OSTK has made an
impressive, but over-extended rip right up to a primary downtrend line
generating from the stocks’s all-time high back in Dec. 2004. Note how
every single overbought reading on this weekly chart, nearly a 10 year
span, has been followed by a very substantial correction. Typically, it
is the move back down below the 70 (overbought) level that confirms a
sell signal when incorporating the RSI into your analysis. As you can
see, the weekly RSI is currently poised to break below that level on any
addition downside or even sideways trading in the stock.
A second confirming signal in the past has been a bearish MACD
cross-over (also shown on the weekly chart). I have included the daily
chart as well listing the targets and a support level which is not too
far below current prices. As this trade is based primary off the weekly
chart, I would consider scaling in or using a small enough initial
position size to allow for a relatively wide stop.
Stops would be on a
SOLID weekly (end of day Friday) close above the weekly trendline and
even then, I might personally give my position at little more room from
there. My plan is to short an initial position here, bringing the short
to a full position once/if the support level on this daily chart is
clearly broken (a solid daily close or sharp move below). Remember,
trades based off the weekly charts can take quite a bit of time to play
out so consider passing on this one if you are a very active or
impatient trader.
Finally, I would be remiss not to point out the fact that OSTK appears to have set up in a what appears to be a bullish pennant pattern on the daily time frame (below), with the requiste flagpole leading up to the recent pennant-shaped consolidation. The fact that this pennant has formed just below that key long-term downtrend like very well could be the catalyst for a break-out above the downtrend line, hence another reason for scaling into the position at this time. However, based on the aforementioned facts above, I believe that any break above the daily pennant pattern/weekly downtrend line will likely be short-lived and ultimately prove to be a bull-trap.
