Tuesday, August 10, 2010

AONE Options Earnings/Breakdown Play

I have been watching A123 Systems, Ticker: AONE, since its IPO in September last year. It has been a dog most of its life so perhaps I have a bias. Here is the weekly chart.

AONE Weekly

From the weekly chart you can see there was a clear down channel for the first half of the year until it started basing in June.

AONE Daily

The daily chart shows the basing channel between 8.40 and 9.50 that took place until the end of July, when it broke higher. Note that after the break out it never took out the May high at 11.50 or solidly breached the 100 day SMA, reinforcing the weakness of the move up. Also note the ascending triangle forming recently with the 100 day SMA pushing through lower, creating a symmetrical triangle within the ascending triangle. This last formation focused me on trading the stock. The resolution of symmetrical triangle pattern seemed imminent and the earnings announcement after the bell today led me to believe the catalyst for a move existed. Upside resistance was at 11 and then 11.50. Downside potential was 9.75 and then 9.50. The Moving Average Convergence Divergence (MACD) was rolling lower and the RSI was falling, biasing me to the downside.

AONE 5 min

I bought August 10 strike puts at 3:12 Monday when the stock was trading at 10.89 for 25c. the puts . The stock had tested the 10.50 support area a couple of times over the last few days and had double topped at 11.50. It also failed to make a higher high after rebounding from the second fall from 11.50. Note that the 5 minute chart above shows the ascending triangle but not the 100day SMA. Today's action quickly broke the trendline and hovered near 10.50 all day.

Earnings did prove to be a negative cataylst and the dotted line shows where the stock last traded in after hours as of 6:45pm. Based on this price and reduced volatility I should be able to sell the puts tomorrow at for at least a double. Not bad for a slightly more than 1 day holding period.

The keys to this trade were a view that the price was going to break out of the formation lower and knowledge of a catalyst to force the action today. Wish me well for the open!

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