DaytradeTeam Brainzzzz

SNDK has had a heck of a year, running from near $20/share all the way up to 65 in a little less than 11 months time as it rallied along with AAPL and other utilizers of flash memory technology. Of course the big run is over now, and the stock has pulled back to around $50 after a couple of downgrades and a natural end to the massive short-squeeze that took place on the stock.

Unfortunately for SNDK shareholders, there are signs that this may be more than "just a pullback", and that SNDK may have another large move to the downside in its future.

Looking at the one year chart of SNDK, you can see the big run the stock had after its initial breakaway gap above 24 this summer. You can also see that SNDK may be in the final stages of completing a head and shoulders formation--typically indicating a reversal in trend and potentially spelling bad news for the stock.

The "neckline" for SNDK's formation is right around $45.50/share. If SNDK can hold above this price and eventually make a new high, the bullish patterns continue. On the other hand (more likely), if SNDK falls through $45.50 on decent volume, the neckline will be broken. This price action would confirm the head and shoulder reversal and indicate a strong likelihood of a new downtrend emerging for the stock.

One of the best ways to play unconfirmed head and shoulder reversals is through the use of straddle or strangle options spreads as the stock approaches the neckline. By entering both a put and a call option at the same time, you profit from a large move in either direction--which is extremely likely if SNDK starts to test the $45.50 neckline.

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