ARIA from Mike

[Pascal]

There are only four stocks to short on Mike's list that was posted last Sunday.
Among those, ARIA had a catastrophic failure.

My question to Mike: how do you select possible short trades?



Pascal

20322

[Mike]

When the market turns down volatility increases. This effect makes short taking difficult. This establishes my first principle: don't short thinly traded stocks. My selection criteria limits me to stocks trading more than 1 million shares per day. ARIA trades more than 5 million shares per day on average.

I only choose stocks that have been leading stocks in terms of price gain in the current or prior rally. ARIA went up 31-fold since 2009. Stocks that advance this far often run out of fuel and finally top. ARIA topped in October 2012. It formed a late-stage base and failed. This brings up two principles. First, a stock that has been a big leader and is now going down still has many-many investors viewing it as a bargain at the lower prices. The bargain hunters will jump in and force the stock up. Fundamentals or what ever else is wrong with the stock will take hold and cause the decline to reassert itself some of this down pressure comes form short takers taking position at the wrong time. This often leads to multiple bargain hunter/short covering rallies followed by retraces. This is how stocks behave when they top. It is important to recognize this and wait for the proper shorting time which leads to principle number 2: wait for the proper moment. The bargain hunting cycle will eventually play itself out as bargain hunters tire from the stock that can't seem to advance and short takers tire from a stock that can't decline. This process can take many months. The proper time to short a stock is often 5 to 7 or months or longer after a stock tops. After several bargain hunting (or short covering) rallies you inspect the rallies for signs of less enthusiasm in the stock by seeing perhaps lower volume advances. ARIA to my eye on a weekly chart had five of these bargain hunting rally cycles. The proper time is not when the stock drops below a prior low, this is a fools play as this area is often when short covering rallies emerge. The proper time is when the stock either fails a key moving average such as the 50- or 200-day or when it stalls out at a logical region of resistance (such as a prior high or key moving average). ARIA exhibited a stall out at the $23 level in its last rally and then dropped to the confluence of the 50 and 200-day moving averages. A failure below these is the trigger for a short sale. Sometimes I short at the stall out region. Either place is far above the $16.95 prior low which is the improper place to short. It would have worked here but probabilities say don't do it.

[Pascal]

Thank you Mike.
I look forward to your next list of short candidates (and the Long ones too) over the week-end.


Pascal