2008 January

Setups for Selling Stocks Short

January 23, 2008 By Chris 15 Comments

I wrote an article on October 15, 2007 titled How to Make Money Selling Short, precisely when the general market indexes were topping. I am not going to take full credit but subconsciously my charts were giving me signals that the market was showing the major red flags and signals of what we are seeing today. This is a direct quote from that blog post from three months ago:

I have (privately) screened several potential shorts over the past couple of months but this market is not ready to roll over just yet. I was early with my shorting analysis in 2006 so I do not want to make the same mistake in 2007. However, more and more stocks seem to be building bases like the ones from the bubble burst in late 1999 and early 2000 (examples in the charts provided).

When I short stocks, I look for longer term trends, not short term swing trades (rarely ever day trades). The shorts I want look like the charts in this post (they take months or even years to complete). I want the high flyers that will be crushed over the next several months. Just as I like riding trends higher, I like riding trends lower over the intermediate to long term (4-12 months). I am trend trader at heart and it is what I do best.

We will have bounces to the upside over the next few months and the Fed will try to stop the bleeding but the stocks that are due for crushing blows will be dealt those blows eventually and we all can profit from them. Stocks may move 20%-50% (in both directions) at times so be careful. I will spend the remainder of the week posting up charts that look ready to become long term losers. Charts similar to the examples below. Give the charts time to form, be patient because many of these will look to move higher at times (as soon as this week and next) prior to their inevitable fall.

Complete Blog Post Repeated from October 15, 2007:
The title of the post is borrowed from the book “How to make Money Selling Stocks Short” by William J. O’Neil. It’s an ideal book for investors that focus on trading longer term trends and don’t necessarily do this for a profession (i.e.: day traders).

The book contains some excellent strategies for finding prime shorting candidates or stocks that are about to enter a declining stage that may offer excellent risk/reward setups for buying put options.

(CLICK FOR LARGER IMAGES)

I consider several of the techniques in the book to be reverse CANSLIM? Study the charts from the past that have setup ideal shorts and then screen for those same characteristics in stocks trading today. Many of the ideal shorts from past market declines have held the reverse characteristics of an ideal CANSLIM stock (that you would want to buy).

Many traders believe that the most obvious area to place a short would be near the peak of stock’s trading range but studies have found this to be untrue.

Characteristics of Longer Term Trend Shorts

Most ideal longer term “trend” shorts take four to twelve months after the peak price to setup on the weekly chart with the majority of these shorts triggering between six to nine months.
Look for stocks that had prior up-trends and support levels that can now act as downward resistance or entry areas.
Once a stock tops and starts to consolidate, you want it to slice through the 50-d moving average and then the 200-d moving average.
A crossover between the 50-d m.a. and the 200-d m.a. is ideal and is graphically presented on each chart in this post
The odds of success increase with each failed attempt for the stock price to recover these major long term moving averages.
Head and shoulder tops can also serve as ideal setups for potential shorts if they take at least five months to develop.
A decreasing relative strength line and a negative pattern on the point and figure chart can also confirm that the stock is rolling over and setting up an ideal short.
Finally, volume should be increasing and the stock should be under distribution as it violates the major moving averages and starts to break former support levels.

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Filed Under: CANSLIM, Selling, Shorting

World Markets Plunge

January 22, 2008 By Chris 7 Comments

Stocks were hammered worldwide Monday following Wall Street’s declines last week and speculation of a US led recession. Media outlets are blaming a weak stimulus plan developed by the US government as the culprit in some of the largest one day declines in world markets since the 9/11 attacks.

Luckily for us, our markets were closed in celebration of the Martin Luther King Jr. holiday. But, we must open Tuesday morning with the added pressure of watching the world drop, sending fear into investors within the lower 48. Will we follow the pack and drop heavily or open with a contrary attitude? If I was a betting man, we open lower with a gap.

The charts below highlight the large drops (many with opening gap-downs) in several markets across multiple continents (Europe, Asia and South America):

Britain’s benchmark FTSE-100 slumped 5.5% to 5,578.20
France’s CAC-40 Index tumbled 6.8% to 4,744.15
Germany’s blue-chip DAX 30 plunged 7.2% to 6,790.19
India’s benchmark stock index, Sensex, fell 7.4%
Hong Kong’s blue-chip Hang Seng index plummeted 5.5% to 23,818.86
Canadian S&P/TSX composite index was down more than 4%
Brazil’s stocks plunged 6.9% on the main index of Sao Paulo’s Bovespa exchange
Japan’s benchmark Nikkei 225 index slid 3.9% to close at 13,325.94 points
China’s Shanghai Composite index plunged 5.1%

The drop in Hong Kong’s market was its biggest percentage drop since the Sept. 11, 2001, terror attacks
The Nikkei gave Japan its lowest close in more than two years
Japan’s Nikkei has now declined 13% in 2008
India’s Sensex saw its second-biggest percentage drop ever (it was down nearly 11% intraday)
Hong Kong’s Hang Seng is now down more than 14% in 2008
China’s Shanghai Index is down 6.6% in 2008 and more than 20% from its all time high from October

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Filed Under: General Market, Misc., Wall Street

Let’s Go GIANTS

January 20, 2008 By Chris 5 Comments

Let’s get it on – 6:30 Tonight. My dog Bob fully supports the G-Men!

Filed Under: Sports

Short Term Oversold

January 18, 2008 By Chris 10 Comments

The market is oversold short term. Can it go lower? Of Course!

I am looking to take my first “long position” in YGE if the market bounces in this position. Below is my trade setup from January 8, 2008 when the stock was trading at $32.24. It closed at $25.17 yesterday.

Potential Trade Set-up:
Ideal Entry: $25.00
Risk is set at 1.0% of total portfolio or $1,000 of $100k
Stop Loss is 10% or $22.50
Number of Shares: 400
Position Size is $10,000
Risk is $2.50
Target is $44.00 (based on former peaks and bottoms)
Reward-to-Risk is 7.6-to-1 with ideal entry; less with current price

The first chart shows the NASDAQ filling my yellow gap within one day; the next stop looks to be 2,200 if it keeps falling.

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Filed Under: General Market, Technical Analysis

Charts Called the Top in October

January 16, 2008 By Chris 10 Comments

The charts clearly called the top of this market in October 2007 and did so with great accuracy. The NASDAQ was flashing multiple distribution days as you can see from the blog posts I made three months ago. You can view the original color charts through the links provided but I am including them here as grayscale images. I wrote about a possible top on several occasions in October but the market leaders continued to move higher so we kept trading the trend.

Bottom line – the warning signs were there, we talked about selling the red flags and it all came to fruition.

The chart tracking the number of stocks on the S&P 500 that are trading above their 50-day moving average has been extremely accurate. It is now starting to call for an intermediate bounce to the upside as the index flirts with the oversold 20 area (see color charts below).

Distribution Day #1: October 12, 2007

The number of stocks above their 50-day moving averages crossed above the overbought level of 80 last week and we saw our first major sell-off distribution day yesterday. This doesn’t mean you must rush today to sell all of your holdings but do understand that the next sell-off is not far from happening. Study the chart below and follow the purple line to see where and when the market had peaks and valleys as related to the number of stocks on the S&P 500 above or below their respective 50-day moving averages.

This is only a secondary indicator but one of the most reliable while trying to look for clues to a short term market top and/or bottom. I have come to realize that the bottom signals have been more accurate than the topping signals over the past several years!

The markets flashed a heavy distribution day Thursday as the NASDAQ was down 1.4% on volume 60% larger than the previous day. This was the largest showing of volume in two months and is not healthy because it was pure distribution. It was only the second distribution day over the past month so we can’t call this a bear run but please be on the lookout for a possible correction of 5%-10%. Technology stocks led the decline as BIDU gave back 10% of its amazing run.

Second Major Distribution Day, October 20, 2007

We witnessed our second major distribution day as the DOW was down 2.6% on volume 40% larger than the prior trading day. The NASDAQ was down 2.6% on volume 15% larger than Thursday.

It was the worst selloff for the NASDAQ since February and the largest for the DOW since August. Volume surged across all major indexes but do keep in mind that it was options expiration day.

Technically speaking, we now have 4 distribution days for the NASDAQ and 3 for the DOW over the past month. It’s now time to start focusing big-time on the market leaders to see where they are going to take this market. If they start to roll over, you better be quick to take profits and even quicker to take losses.