Instead of a general daily comment today, I decided to publish this Portfolio Management article, because it offers three different patterns for short trading, which could be interesting for a market educational purpose.
With markets breaking to new highs almost every day, shorting is a very dangerous business. On the other hand, shorting weak stocks when the general market is strong has worked in the recent past.
I plan to short today, but will focus on risk management, which means that I want to keep a neutral portfolio. The general idea is that the market will "digest" or pull back next week.
The list of the day is below.
The three interesting stocks on the long side are not leading stocks. They have pulled back and could easily bounce in the current market.
HELE is not such a strong idea. The only advantage is that it is showing a positive divergence. However its downtrend does not show signs of reversal as of now.
ORLY is at a support level and looks poised to move one way or the other. This means that you either buy a break-out above $150 or you buy a pull-back to $145.
SSYS has been under accumulation for some time, but is still way below its previous highs. Earnings looked rather good to me. Hence, in a bullish market, it could regain some momentum, especially with DDD that is shaking out its shareholders by issuing a secondary after the stock dropped 50%.
On the short side, I separated the many prospects into three categories. All of these stocks are in a high supply zone, which means that traders are more eager to sell to cut losses than to buy them.
Pattern 1: The Broken stocks that are pulling back to resistance on a weak EV pattern
The general idea here is that as a stock that once broke below an important support level is pulling back to that level, shareholders who could not sell and were locked in are now maybe going to sell and book a smaller loss.
X has broken through its 200MA and is now trying to bounce to the 24.5 resistance level. If the stock can go above that level and regain the 200MA, then we can see that it will enter into the stable 10% supply zone, which will be an indication that sellers will dry out.
BRCD has had an impressive bounce in the past weeks. However, the LEV pattern is very negative. The stock is now at a resistance level and could be shorted here. Note that this will greatly depend on the state of the market: if the market continues straight up, then BRCD could do the same, because its bounce has corresponded to that of the general market.
PRGO broke once and has now bounced to resistance. It is even making a small double top at that resistance level on a weak EV pattern.
2. Pattern 2: The stocks that are in a trading range, but under a negative EV trend.
This type of pattern can be traded either on a bounce to the top of the trading range or when the price breaks below the trading range.
ELY is a golf club maker. The stock broke once and has now bounced to resistance. Not sure that it is going to break here. hence, you can either short a break of the actual range, or a bounce to the high part of that range. A stop should be placed around the Neutral Boundary, which is above the actual trading range.
NILE is not doing well. It broke some weeks ago but has now bounced. We can see that it is forming a trading range. Shareholders hesitate on a continuation of the bounce or on a failure. We can see that volume is relatively low, which makes shorting more difficult, but also renders the LEV/SEV pattern more difficult to read. In such a case, the best is to switch to TEV.
WAT Broke twice and is now in a small trading range. the LEV pattern is slightly negative. In the current market, the stock could bounce further. I would prefer shorting a break below the current trading range.
3. Pattern 3: The stocks that just broke below a key support level and are in "free fall."
To trade these stocks on the short side is relatively difficult, because moves are very sharp. The best is to enter a short at the open on a small position and then increase the position on bounces... if bounces ever occur.
GNRC is an example of such a potential short trade. It broke yesterday and funds will be happy to rotate out of the stock. EV is of little help here, as everybody can see that the stock broke. EV only confirmed the break. It is only if the stock bounces on a weak EV pattern that EV will be useful for you to decide to increase the short position.
ANN broke below a strong support zone on a very negative EV as most stops were hit. You can short a bounce to that zone if the general market is strong enough to push the stock back up.
