Anatomy of a Short – Day Two


Like SPX, BAC did very little for the rest of the day.  Unlike SPX, however, this meant a continuation of the slow, steady decline it started this morning.  While SPX traced out what is probably an ascending triangle, BAC has more of a pennant look to it, trending down on the day.  These patterns typically continue uptrends; but, neither is particularly well formed, so I won’t read too much into them.

The August 11 puts closed at .97.


BAC hit the MA and has started back down.  The RSI recharged, made a lower high and is apparently on its way back down.  The histogram is turning negative.  A moment of truth is coming up, when the RSI hits the TL it broke through when it recharged.  It’s possible it bounces off that TL and goes on to make a higher high.  The weakness relative to SPX would argue otherwise.

Incidentally, in watching the 5-minute SPX chart, we seem to have broken out of a rising wedge Wednesday.  The backtest on Thursday failed.  In other words, it rose above the wedge and, in fact, started forming another one that broke down last night.

It appears we’re in backtest mode, but with much less gusto than occurred yesterday.  In fact, there’s a divergence setting up between the index and its RSI, MACD and Histogram.  While the index is making a run at a higher high, the indicators are all sloping downward.  In general, the indicators win out.  This action is normally indicative of a stock that’s ahead of itself and due for a correction.


BAC complete the first wave down and is trying to rebound.  In a stronger stock, the retrace might make it back to the rising wedge TL in the form of a backtest.  Here, it will likely run into resistance at its 200 period moving average.  I’m watching the 5 minute chart, as it does a pretty good job of showing the short and medium term picture at the same time.

And, I use the RSI as a trading guide.  More often than not, when RSI is above 70 I start looking for a downturn; and, a level below 30 indicates a bottom.  But, because it’s only 5 minutes out of the day, it needs to “recharge” when it reaches either extreme.

I’m charting BAC alongside SPX in order to keep an eye on its relative performance.  So far, it seems to be having a tough time on a relative basis.


Bank of America has fallen from its rising wedge and is down .10 this morning.  The August 11 puts hit 1.00, for potential 10% profit in one day.  If only they were all this easy…

Ordinarily, I would take the 10% and run, but: (1) I expect it to fall further after backtesting the wedge; (2) BAC should really take it on the chin when the overall market tumbles; and, (3) I’m having too much fun.

My price target on a breakdown from a falling wedge is the wedge’s inception.  In this case, it’s 9.40, which should put the puts at an intrinsic value of 1.60.


Anatomy of a Short – Day Two — 4 Comments

  1. DM: the latter. It's a suckish stock in a suckish sector in a suckish market. I don't follow PNPFF, but from looking at the chart, seems like a good candidate for a downside bet. It only managed a 23.6 fib retracement off its 2008 lows and seems to be stuck a rising wedge since then, and in a downward channel since Feb 2011. Looks like those two patterns intersect at the end of August at 2.36 or so. I'm very much expecting the next leg to be down, with this past week representing a lower high. While we could test it again, I think the 1370 high will not be broken.

  2. NDX/Q's did not make a new high on Dec 21, 2008 (or early Dec). Also the A/D line was in a downtrend since the summer. These are some differences….maybe need more time to set up the turn?

  3. So, it seems to me that you are using BAC as a leading indicator for the S&P;, or are have you just identified BAC as a ripe short?

    I use PNPFF:US (Pinetree Capital) as my leading indicator for legs down. PNPFF looks to be in a solid rising wedge since early June. Certainly it could break the pattern to the upside, but it seems to me that hot money in the juniors space is getting cold feet.

    I know that John is going long Gold Juniors, and I feel that he and you have been dead on the last two months. Do you have any comments regarding PNPFF, and using it as an indicator? Also, are you still leaning towards your past medium term charts for another leg down around 1340-1350?