A bearish bet on a stock whose chart is raising some red flags

Two weeks ago, I had covered a trade on Alibaba using a very popular indicator called the MACD (Moving Average Convergence Divergence). Though the MACD is a lagging indicator and tends to deliver signals later, it's highly favored among trend traders for providing reliable cues on trend changes. I believe it's giving another good signal on a new stock.

In the six-month daily chart of consulting firm Accenture (ACN) below, I have highlighted multiple instances where the blue line (the MACD line) is crossing below or above the yellow line (the signal line). This crossover often indicates an upcoming trend reversal. Note that a bearish crossover is happening again for ACN indicating a loss in upward momentum.



I cover many of these set-ups in my book Mean Reversion Trading . With a bearish outlook on ACN, I’m utilizing a strategy known as a "bear put spread" to potentially profit from a pullback. The trade This involves purchasing a put option with a higher strike price and simultaneously selling a put option with a slightly lower strike, creating a net debit position.

For example, if ACN is currently trading at $361, I’d consider buying a $365 strike put and selling a 360 strike put to complete the setup. ACN YTD mountain Accenture, YTD Here is the exact trade setup: Buy $365 put Nov 15th expiry Sell $360 put Nov 15th expiry Cost: $250 (limit price $2.50) If ACN is trading at $360 or below on expiration date, this trade will generate a 100% ROI on the amount risked.

Adding 10 contracts, one could risk $2,500 to make $2,500 on this trade. Please note that this week is packed with critical earnings reports from major tech players. Strong earnings results from these mega-cap companies could significantly shift the Nasdaq's direction, affecting ACN’s price movement and impacting the effectiveness of this bearish trade.

-Nishant Pant Founder: https://tradingextremes.com Author: Mean Reversion Trading Youtube, Twitter: @TheMeanTrader DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY .

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