Parabolic SAR Sell Signals

By Cory Mitchell | October 09, 2013 AAA

The SPDR S&P 500 (ARCA: SPY) slid below support on October 8, on strong selling and high volume, indicating the correction is continuing. While the longer-term uptrend remains intact, taking some profit off the table is prudent, and for more aggressive traders shorting opportunities are available. The Parabolic SAR is a trend following indicator which provides entry signals, and then acts like a trailing stop, allowing the trader to hopefully profit and exit when the indicator signals it. When a stock shifts into a potential downtrend, the indicator moves on top of the price bars. As long as the dots remain on top, the downtrend remains in place. Such signals occurred in the four stocks below. When the dots move below the price, it's time to get out of the short position as the trend may be turning back up.

Itau Unibanco (NYSE: ITUB) has been underperforming the market most of the year. While it did see a strong run-up in September, it was small compared to the strong selling pressure seen in March through July. On October 8 the Parabolic SAR indicated it was time to exit longs, and potentially enter short. There is support at $14, so a drop below that provides confirmation of a likely move lower and therefore is a higher probability entry point. Initial stops can be placed at $15 or $14.50 and then scaled lower with the indicator.

Pandora Media (NYSE: P) on the other hand has been very strong this year, opening the year near $9 and recently hitting a high of $27.93. Since then the price has fallen on aggressive selling, declining 7.76% on October 8. The high created a potential double top formation, just pushing past the former September high. If the price falls below $23.77 the double top will be in place, adding to the evidence the stock is in retreat. The Parabolic SAR flashed a sell signal on October 8, and can be used as a trailing stop if the price continues to fall. The ideal stop level is $28, but that is too much risk for the potential reward, therefore a stop at $26 still provides relative safety from being stopped out, and a better risk to reward ratio.

Radian Group (NYSE:RDN) has been moving in a more ranging fashion since mid-May, showing relative weakness over this time compared to the overall market. In addition to the October 8 Parabolic SAR sell signal, the price also broke below a triangle formation. The downside target for the breakout is $10. Due to the ranging nature of the stock, waiting for a further move down move will provide more adequate confirmation for a short-trade. Support at $13.12 is the next level to watch.

Xerox (NYSE: XRX) overall remains strong, although the Parabolic SAR signal combined with selling pressure in the overall market indicates taking some profit of the table could prove wise, at least for the short-term. Shorting at this time is not recommended, as the stock has held up quite well, showing relative strength. Support is at $10, with a drop below that indicating the stock may be succumbing to some weakness. A drop below $10 followed by a lower swing high in price would provide a more compelling short, if that scenario occurs over the next few weeks. If the overall market finds some support though, this stock is likely to continue higher.

The Bottom Line
The Parabolic SAR is one indicator that can help determine trends, as well as provide entry and exit signals. While it is a useful tool, the overall price trend should always be considered while trading. The S&P 500 is still in an overall uptrend, despite the recent pullback. Shorting opportunities should be viewed as short-term trades at this point, as the market hasn't provided sufficient evidence to conclude a full fledge downtrend has started. Utilize stop loss orders to manage risk, which can be adjusted daily in alignment with the Parabolic SAR indicator.

At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

Charts courtesy of StockCharts.com

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