In my post the other day, Still Stalking Sohu, I wrote that I thought the stock would move fiercely out of the coil it had formed. I was looking for price to move down violently, but instead it went up dramatically, jumping over 25%. When I'm looking to short a runaway stock I don't just enter the position willy-nilly: I have to see it make an intraday reversal, preferably off of the opening range. I'm going to explain this opening range reversal technique in this post.

Describing the range contraction in SOHU through May 1st

The opening range is the price range that is established during the first 30-45 minutes of trading. You can stay out of trouble by waiting for the range to define itself, and then prepare to get short only if price breaks below it. As you can see in the chart below, on May 2nd price shot out of the opening range and never came close to breaching the low. There was no way to look short on this day.

Opening Range on May 2nd for SOHU

The chart below shows that again on May 5th price jumped higher out of the opening range, thus making it still impossible to establish a short position.

Opening Range on May 5th for SOHU

Yesterday price finally breached the opening range low making a short position possible. The opening range high of $19.88 acts as an excellent pivot to place your protective buy-cover stop. A good entry would have been in the $19.40 area giving you about 50 cents worth of risk. As price continues to fall you can choose to move your protective buy-stop down accordingly, first to breakeven, and then begin to lock in your gains.

Opening Range on May 6th for SOHU

The simple rule of waiting for the opening range to form before taking a short position will keep you from getting clobbered by runaway stocks like Sohu, and it will also help you define your risk by allowing you to set stops off the opening range pivots.

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