After dropping drastically over the past several weeks, the market has finally started to recover a bit over the last few days. For now, all looks better. However, as the market continues to move higher, I believe the rally could end up being short lived. If you missed out on entering short opportunities when the initial sell-off started, you may want to look to rallies for a 2nd chance to get short on a few stocks. One stock worth watching on a move higher would be IRBT (iRobot Corporation).
iRobot Corporation (iRobot) designs and builds robots. IRobot’s home care robots perform time-consuming domestic chores while its government and industrial robots perform tasks, such as battlefield reconnaissance and bomb disposal, multi-purpose tasks for local police and first responders, and long-endurance oceanic missions. It sells its robots to consumers through a range of distribution channels, including chain stores and other national retailers, and through its on-line store, and to the U.S. military, as well as other government agencies globally.
Please take a look at the 1-year chart of IRBT (iRobot Corporation) below with my added notations:
IRBT has formed an important price level at $30 over the course of this year. After breaking below that key $30 level earlier this month, the stock moved lower as expected. As the market has rallied higher, IRBT has started to make its way back up to the $30 level. If IRBT does make it back to the $30 level, one would expect that the stock would resist that level and most likely move lower again.
The Tale of the Tape: After breaking its key level of $30 earlier this month, IRBT moved considerably lower as expected. Now that IRBT has started to recover, the $30 level should act as resistance if the stock gets there. From there, IRBT should move lower again, thus a trader would want to enter a short position with a stop above $30. A break back above $30 would negate the forecast for a move lower.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT