Down move likely to resume | stockbee


Down move likely to resume

Downside moves in market are punctuated by counter trend moves. Last week was good example of it. The perma bears as well as perma bulls turned bearish ,only to get stopped out in most cases. When playing the short side just selling short weakness may not be the best strategy. Anticipatory entries work best on short set ups.

While I am always willing to buy a breakout on long side, I am extremely reluctant to sell downside break of same magnitude. The odds of it continuing are low. You have to wait for the immediate bounce back to play itself out before finding a low risk entry. That is what is happened to lot of traders who excitedly sold short after market weakness.

Similarly on individual stocks lot of time I see people shorting top relative strength stocks. While you may get 5-10% fade move, in most cases on stocks V reversals are rare. A stock with high relative strength will in majority of cases go sideways for considerable period of time (up to 6 months to 2 years), before offering a long term short opportunity. At least that is what my study of momentum stocks shows.

The probable reason for such behaviour is that earnings trends persist. That is why to find good shorts you need to find again sudden shifts in earnings or in earnings expectations. Analyst taking down their earnings estimate is one good way to identify short sells candidates. When you see a series of analysts pulling down their earnings estimates on a top performing stocks you have to be careful.

PSPT was one such stock recently, which had this analyst behavior. The Zacks and Starmine methodologies use that approach. Even IBD in its commentary on specific stocks in IBD 100 or in stocks on move will mention such red flags. Those reading IBD carefully would have noted the same thing being mentioned by IBD about PSPT couple of times in recent month.

So ideal short set ups are around on stocks which had good relative strength or were members of 100% plus universe 2 years to 6 months ago. Many of those stocks will have accelerated moves down in corrections. Many of them have been stuck within 20 to 25% of their high in sideways move for long. They are the ones which generally have smooth moves down in corrections.

Market Monitor
Total 4% plus bullish breakouts=79
Total 4% plus bearish breakouts=55
65 day bullish/bearish ratio= 613/314
Stocks up 50% or more in a month=8
Stocks up 25% or more in a month=46
Number of stocks with 100% plus move =293
Number of stocks up 200% or more = 60
4% plus signals for 100plus universe=18
4% plus signals for 200plus universe=3

Select stocks which had 100% plus move in last 260 days from the low and which are up more than 4% on higher volume. Today's minimum volume is above 100000.
ALAN,Alanco Technologies (Google  Yahoo  Earnings  Chart
ARGN,Amerigon Inc (Google  Yahoo  Earnings  Chart
BCSI,Blue Coat Systems Inc (Google  Yahoo  Earnings  Chart
BIG,Big Lots Inc (Google  Yahoo  Earnings  Chart
BTJ,Bolt Technology Corp (Google  Yahoo  Earnings  Chart
CVNS,Covansys Corp (Google  Yahoo  Earnings  Chart
FSYS,Fuel Systems Solutions Inc (Google  Yahoo  Earnings  Chart
JSDA,Jones Soda Co (Google  Yahoo  Earnings  Chart
LJPC,La Jolla Pharmaceutical (Google  Yahoo  Earnings  Chart
MVIS,Microvision Inc (Google  Yahoo  Earnings  Chart
NYMX,Nymox Pharmaceutical Corp (Google  Yahoo  Earnings  Chart
OMRI,Omrix Biopharmaceuticals Inc (Google  Yahoo  Earnings  Chart
ORCH,Orchid Cellmark Inc (Google  Yahoo  Earnings  Chart
SNCR,Synchronoss Technologies Inc (Google  Yahoo  Earnings  Chart
SVNT,Savient Pharmaceuticals Inc (Google  Yahoo  Earnings  Chart
SYNL,Synalloy Corp (Google  Yahoo  Earnings  Chart
TAG,Tag-It Pacific Inc (Google  Yahoo  Earnings  Chart
TSL,Trina Solar Ltd. (Google  Yahoo  Earnings  Chart


Tim said...

How do you get Telechart to give you stocks up more than 100% in past 260 days when the stock doesn't have 260 days worth of history?

Pradeep Bonde said...

You can not do it in TC2000, I pull the data from TC2000 in to my own software to do it.

garytt said...

I was wondering what your take on the market in the short term. I am positioned with a small postition in one of the UltraShort funds and was also expecting more downside at least to test the lows of a couple of weeks ago. However, alot of people are saying the same thing which worries me a little. We all know the market likes to climb that "wall of worry" and I don't want to get left behind like I did last June. I also have a couple of long positions that are doing well so I have the short fund as a bit of protection.

Pradeep Bonde said...

It is mixed market for next 2-3 months with downside bias.

F. said...

Yep. Another good article.

paulin said...

Blogger poll at tickersense very bearish. Would be interesting to see how this week goes....I dont' want to take a contrarian approach rather I would be on the sidelines watching them sweat it out....

Prashant said...

Excellenet ideas! I too noticed that for shorting, entry based on anticipation helps. The main reason for that is because, the stocks move down very fast. So, shorting based on breakdowns is not easy. But sometimes such stocks bounce a little which again is a good chance to short. Of course one needs to be very careful about premature shorting - meaning, shorting when there is still relative strength for upward movement. The idea about looking for stocks with earnings slowdown seems very good and will keep that in mind.