Potential Strategy - Overextended Short

I’ll start off by saying this is nothing new and Kunal Desai has written blog posts about a similar strategy involving bollinger bands. Unfortunately, I cannot find the link to it but I did see it while researching bollinger bands and stochastic RSI.

I’m subscribed to GDT on YouTube and during one of his recap videos it connected a few dots. What he has been doing lately is shorting extreme spikes expecting them to pull back enough to have a profit.

The particular stock in the video was $CPRX on 3/27. It spiked into $5.50 resistance (half dollar) then pulled back allowing for a quick 20c gain. And that’s what clicked in my head. Shorting into a whole or half dollar number - since it’s just psychology. People love to sell at or short at whole/half numbers.

I wrote a quick strategy to trade that stock then rewrote it the next day to simplify it. On Friday there were a few losses but also one giant gain that wiped out all the losers.

Let’s take a look at that nice gain on Friday. $WTW spiked very sharply near the open into a whole number. The algo shorted it at $20.98 with a stop of $21.05. It was out within the next 5 minute candle for an easy win.

The goal of this strategy is to short into a wall of resistance and get out as quickly as possible for a win. Even though this stock dumped for hours that may not be the case for each trade. I only have a small sample size at this time, so I may need to change that in the future in case this strategy really works.

The Requirements

  1. Must be at the whole/half number (within 2c on either side of it).
  2. The candle high it shorts needs to be outside the upper bollinger band.
  3. RSI must be above 70.
  4. Stoch RSI must be above 80.

Some tweaks I may consider:

  1. Whole numbers only (half numbers may not be as consistent).
  2. Daily resistance (could increase odds).

$WTW 5m candles

I’ve since added support for finding resistance on the daily chart (can be toggled) that coincides with the whole/half number. In theory that should increase its odds of having a win.

As you can see from the chart below, there was indeed resistance on the daily chart at $20.99. It’s never exactly the whole/half number and it’s more of a range like within 15c.

$WTW daily chart



Disclaimer

I am not a registered financial adviser/broker/anything. Use this information for entertainment/informational purposes only. Any tickers mentioned are not recommendations to buy/sell/or sell short. They are used as examples only.

Please remember that past performance may not be indicative of future results.