Applied Optoelectronics, Inc. designs, manufactures, and sells fiber-optic networking products primarily for Internet data center, cable television, and fiber-to-the-home networking end-markets.
Take a look at the 1-year chart of Applied (NASDAQ: AAOI) below with the added notations:
After rallying to new highs repeatedly during the past month, AAOI has taken a steep drop. Over the past 3 months, the stock created a key price level at $60 (green) that has provided both support and resistance for AAOI. Now that the stock has fallen back down to that level again, traders could expect some sort of a bounce.
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The Tale of the Tape: AAOI has a key level at $60. Traders could enter a long position on a test of $60, with a stop placed below that level. Traders that are bearish on the stock could enter a short position on a break below that level instead.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT
Follow me on Twitter: @cmtstockcoach