I like to fade overwhelming market sentiment. When everyone on Twitter and Reddit is hyping up a stock, I am looking for opportunities to go short. When everyone thinks stocks are about to crash, I am looking for opportunities to buy. I let the chart tell me if there is a good trading opportunity setting up, not a bunch of Apes on Reddit.
A few weeks ago, I discussed how meme stocks looked ready for a pullback. There was so much hype, but the stocks were no longer going up. The pullback I was expecting occurred. Now some of these stocks might be setting up for a bounce opportunity.
Trading is a game of people and psychology. The best trading opportunities come from being ready to trade a plan around other people’s pain or potential pain.
When all the apes on Reddit were pumping AMC ENTERTAINMENT (AMC) to $400 and CONTEXTLOGIC INC (WISH) to $20+, I was anticipating short opportunities. My thinking was along these lines:
Once the Redditors finally realize these stocks are not going any higher, they will be running over each other to get out. The market will crush their dreams of yachts and Lambos. Once “buy the dip” no longer works, these new traders with no adherence to risk management will be forced out of their trades by their broker or left holding the bag.
Now that all the traders who chased these stocks at high prices are underwater, and short-sellers are getting confident, these stocks are looking more attractive in the short term, and a bounce play may be on hand.
Let’s take a look at some charts and discuss the potential psychology behind the patterns.
Taking a look at the daily chart of WISH we can see that it failed to break out above $15. It failed at $15 resistance double top area, a major level of interest. Everyone on Reddit and Twitter were pumping 20+ and anyone buying this stock for the breakout without a stop loss is now trapped. We can see the market has had no mercy, and the stock has sold off 40% since.
Now let’s look at a lower time frame to see how this potential bounce trade is setting up.
Since the 40% selloff, we can see that WISH has found support at the $8.80 making a double bottom. The 13 and 30-hour moving averages (MA) are curling up, and we are holding above the 30 hour MA and 7-day VWAP. This is a bread and butter setup for me for a potential long trade.
Now that all the chasers are trapped and the stock has consolidated at an attractive level, I will be stalking for a long. I want to be in the trade at good prices. A potential first target is the 200hour MA at $11.24.
After failing to breakout above $70, AMC failed below $50, making a nice move down to $40 and then $32. Since then, it has held well, crushing options volatility. It went nowhere last week, holding between $40 and $36. Every day there was so much options decay. All call buyers above $40 and put buyers below $36 failed in trading for a breakout or break down.
This is a stock that “should have died.” So far, it hasn’t. Thus shorts may be vulnerable here. This may be an opportunity for a short term trade on the long side, and I will be watching it closely.
Taking a look at the 60 minute chart on AMC, it is not quite ready for my bread and butter setup. It is below all moving averages and the 7-day VWAP. I will be watching it this week to see if buyers can step in and cause shorts some problems.
Of all the MEME stocks, based on fundamentals, WORKHORSE GROUP INC (WKHS) may be the worst of all of them. However, there was strength in the electric vehicle sector towards the end of last week with TESLA INC (TSLA) and NIO INC (NIO) stock having increased buying pressure. Although I do not like the fundamentals of WKHS, I’m a trader, and I have to respect the chart and what it is showing me.
After failing at $18 three times WKHS has found support at $10.70 and has consolidated with the top end of the range at $12.20. This is another stock that “should have died”. In my opinion, there is no reason this stock shouldn’t be trading at $8 or below, but it is holding higher, and as a trader, I must respect the price action.
WKHS is holding above the 30hour MA on the hourly chart and is right at the 7-day VWAP. I will be watching for signs of more buying. If buyers can take control, a move back towards the 200 hour MA at 13.13 is not out of the question. In the short-term, the resolve of some short sellers may be tested.
Bottom Line
Like it or not, meme stocks are now a thing. A recurring trend in the market that can be traded. I like to trade against the herd. I want to play against the psychology of trapped traders. When I see blood in the streets, that is when I want to buy. I see such a pattern potentially setting up in the meme stocks. They are holding higher when “they should have died.” This week I will be watching meme stocks closely for any long setups that might put pressure on shorts in the near term.
