Heyer Capital, LLC

investment management and timely advice from a local CPA (Fox Valley, Wisc.)

Archive for November 2007

Stock short setups

leave a comment »

Shorting stock is definitely not for most folks, but I agree with William O’Neil (founder of the Investor’s Business Daily) that the best time to short stocks is when the charts is most amenable.  Just like buying a stock too early can lead to losses, shorting stocks too early is also a path to frustration. Let’s get beyond the basic rule: never short a stock that is still climbing, hoping to short at the peak.  Life is too short to lose money that quickly.   

 Instead, wait for a stock to peak, roll over, and wait… for… it…, make failed attempts to rally (particularly against the 50 day moving average.)  Wait for the big break in price and spike in volume, and then leg into the short.  I just happened to find a recent example that fits the bill.  Bill O’Neil suggests watching for a head and shoulders-type pattern, railroad tracks, climax top, or other typical “top” pattern.  More on those later.  The beauty of this example is how the stock reacted against the 50 EMA.   Let’s check the chart (click to enlarge).  

  Tidewater TDW  

   The run-up starting at the Point A break out from the base is a textbook 5 month advance. The chart doesn’t show it, along the advance is held close to its 21 EMA, indicating strong institutional support. At Point B the stock starts making advances in price on low volume (Point F), and eventually rolls over in heavier volume.   If you were long the stock the prior few month, hopefully you took note of the violation of the 50 EMA  and booked some profits.   

 It’s important to note that the first stab down a Point C is not the typical, ideal short entry point. As Bill O’Neil points out, that’s just too obvious, and the market rarely lets ‘obvious’ win.  Besides, the stock had been a winner for months and surely the $10 pullback would bring in the bottom feeders hoping for a bargain. Why get in their way?  Maybe the stock is merely carving a nice base, and preparing for the next leg up.   

  The real “tell” is at Point D.  Three times, the stock makes a break above the 50 EMA, but can’t hold gains.  The stocks is faced with just too much overhead selling – folks that bought in the second half of the run up (April through July) that are trying to get out.    

Finally the stock gives up the ghost and at Point E (Oct 16), makes a definitive break downward on heavy volume after an earnings miss.  When shorting, that’s what you want to see: faltering earning momentum (or other catalyst); two, three, or four failures at the 50 EMA;  and a high volume price break.  

Advertisements

Written by heyercapital

November 29, 2007 at 11:13 pm