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Published: February 18, 2010
This is the best spot to put on a short
sale I've seen in a long time.
When the S&P 500 broke the rising-wedge chart pattern to the
downside back in mid-January (something we warned about here and
here), the intermediate-term trend for stocks changed. The trend
transitioned from what looked like a straight shot higher into a
period of correction.
And during corrections, traders profit by shorting stocks.
But the decline from the rising wedge was so violent and so
fast, there simply wasn't a good, low-risk entry point for a
short trade -- unless you anticipated the decline and went short
ahead of time. Stocks quickly went from overbought to oversold.
And anyone shorting into an oversold market runs the risk of
getting caught in a violent bounce. Which is exactly what we've
seen over the past few days.
Take a look...
The red lines on the chart indicate various support levels
for the S&P 500. As each support level is violated, it becomes
resistance for any bounce attempt. You can see how the market
held support on the daily chart near 1,050 and has now bumped
back into resistance around 1,100.
Here's how it looks on a shorter-term, 60-minute chart...
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If the current correction has farther to go, which I think it
does, then the S&P 500 should fall to one of the lower support
lines -- either around 1,020 or 1,000. The index is currently
bumping up against resistance at 1,100. The resistance should be
strong enough to hold back any further rally attempt.
Aggressive traders can short stocks here with the idea of buying
them back as the index approaches one of the lower support lines
-- 80 to 100 S&P points lower. On the other hand, if stocks
continue higher, short sellers can cut their losses if the S&P
500 makes a decisive move above 1,100 -- say 1,105 or so.
That limits the risk to just five S&P points while the reward
could be as large as 100.
You won't often find a more favorable short-selling setup than
that.
-- Jeff Clark
Editor
Advanced Income
Note: This article originally appeared on
Growth Stock Wire. |
