One for the downside: Cognizant Technologies

• Posted by Greg Harmon
• on April 27th, 2015

I am a top down technical trader. That means I look for the trend in the broad market first and then look for stocks that are set up to move with the trend to outperform. From this process I have been on the long side of the market since 2009. Nothing has happened with the indexes to change the uptrend. That means it is a rare occasion where I find a stock that I want to short. One of those came up this weekend.

Cognizant Technologies ($CTSH) had moved higher with other consulting company names early in the year. But then it just stalled, and moved sideways with the broad market. That is not a problem. But Friday the stock showed signs that it wants to head lower.

The chart above shows that rise, consolidation and now a move lower. The move Friday took the stock under support. That was the first reason to look at a downside trade. The momentum indicators are also running lower. And the Bollinger Bands® are opening to the downside. There is some possible support at the top of the gap and the January high at 56.65. And then on a gap fill at 55.22. It may not look like much of a trade but that is a 4.9 to 7.4% move lower.

The company reports earnings Monday May 4th before the open, so this could be a quick trade. You could short the stock against a stop at 60.25. That gives a reward to risk ratio of 4:1 or better. But that still leaves you open to a gap up move in the stock. A better way to trade this is either the May 1 Expiry or May 8 Expiry 59.5 Strike Puts. If you have a view of a bad earnings report then use the longer options. Otherwise for less than the cost of your stop loss on the stock trade, 60 cents, the May 1 Expiry Puts area defined risk way to trade it. I bought some shortly after posting this.

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