Let’s Learn Something New

 

Hey Shoppers,

 

You have all seen me use my three favorite candlesticks: the doji, the hammer and the hanging man.

 

They are great at signaling changes in stock trends.

 

Now I would like to introduce a new candlestick formation to our repertoire.

 

It is called an engulfing pattern and it also signals trend changes.

 

The engulfing pattern requires two consecutive candlesticks — which can be bullish or bearish — and is found at the top of an uptrend or the bottom of a downtrend.

 

The engulfing pattern looks just like the name. It is a candlestick that engulfs the whole real body of the previous candle.

 

Behold the bullish version …


      • A bullish engulfing pattern will be a green candle (or white), taking over the real body of the previous candle which has to be red (or black).
      • It does not have to engulf the upper or lower shadows, if there are any.
      • It is found at the bottom of a downtrend which can be short term in duration.

 

And the bearish version …


 

      • A bearish engulfing pattern will be a red (or black) candle following and engulfing a green (or white) candle.
      • It will engulf the whole real body but doesn’t need to include the upper or lower shadows.
      • It will be found at the top of an uptrend.

 

Engulfing PLUG

 

Here is the bullish engulfing pattern in Plug Power (Ticker: PLUG).

 

 

It has since traded higher and I think it will continue to trade up to at least $30.50.

 

PLUG traded a high of $75.49 on Jan. 26 and has been in a downtrend ever since.

 

The recent low was $18.47 on May 11. It closed at $24.58 on Friday.

 

Looking at the options, I would like to buy a call spread in the Jun18 cycle. It has good volume trading and the markets are pretty narrow.

 

 

I like buying the Jun18 25 calls with an implied volatility of 92.08 and selling the 31 calls with an implied volatility of 95.28.

 

Paying $1.60 for this six point spread with 35 days until expiration is a great value.

 

Now there are two caveats to this trade idea …

 

      • The earnings come out on May 20, which will most likely move this stock and the volatility can come down once the earnings are announced.
      • Since I am only paying $1.60 for this spread and it has 35 days until expiration I am willing to ride out the earnings announcement.

 

If the spread trades below a dollar, I will take my losses. I would like to see the stock trade close to $30 before I begin to take any profits.

 

I hope I have helped you expand your mind — and your trading account! 

 

Thanks for Reading … See You Next Tuesday!

Licia Leslie

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