Anatomy of a Short

ORIGINAL POST:  10:50 AM PDT

Just a little experiment here, to demonstrate how technical trading works.  Bank of America, hailed as a screaming buy after losing only $8.8 billion in the latest quarter, is currently trading at about 10.24.

It seems pretty well stuck in a descending channel that’s had BAC circling the drain since last February.

Lately, it made a nice move up after posting an $8.8 billion loss that, supposedly, cleaned up its mortgage liabilities.   Here’s a close up.

 As can be seen in this chart, the stock broke though overhead resistance in the form of a TL that’s kept it down for 7 days.  But, in so doing, it runs smack dab into heavier resistance in a TL that dates back to Jun 29.

It also formed a rising wedge in the process, and is most of the way back toward the top of the channel that’s contained it so effectively for months.  If BAC continues in the channel, it could fall back towards the lower end in short order.  The divergence between its price ascent and its RSI descent adds to my confidence that this is a great stock to play on the downside.

I’m picking up some August 11 puts at .90 each.  We’ll see how this plays out; I’ll post an update each day until I close out the position.

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