Wednesday, March 26, 2014

The Diamond in ON Semiconductor

by Greg Harmon

I posted a chart to twitter over the weekend on On Semiconductor, $ONNN. I drew out the Diamond you see below. It has a move of $1.50, from 8 to 9.50 into the pattern as noted in the arrow. Many were quick to suggest that it will break down and close the gap to 8 as Diamonds are topping patterns. That may happen. But technically a Diamond is a consolidation pattern and can break out to the upside as a continuation as well. The technical set up seems to suggest the downside with a Relative Strength Index (RSI) that is falling and a MACD doing the same. But if you look at the accumulation distribution statistic it is on the lows where the stock has rebounded from in the past. Should it break to the upside then a target near 11 would be in hand. So how do you prepare for this? Using the stock you wait for the break out to happen and enter on the trigger either long or short. If you are comfortable with options then buying the April 9/10 Strangle (offered at 30 cents, buy both the April 9 Put and April 10 Call) is a cheap defined risk way to play for a move no matter which way it goes. You will lose though if it just keeps heading sideways as time value decays.


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