Tuesday, June 29, 2010

Time to consider shorting stocks?

For some reason curent price action in leading stocks and in the market indexes are reminding of the feeble rally from late November to late December in 2007. The correction that preceeded this rally lead to many leading stocks at that time forming third and many fourth stage bases. However, when these leaders tried to break out of these bases in December most of them failed. Two vivid examples from this period were AAPL and ISRG. The reason they stood out for me was that I bought these two stocks when they broke out but was stopped out not too long after getting long.

Most of the leading Chinese stocks like TSTC, RINO and CGA have already topped out since Nov 09 to Jan 10 and have fallen through and are now well below their 50 day and 200 day MA's. Some other noteable American stocks have also toped out like GOOG, V, MA, PCLN and GMCR. However, stocks like AAPL and BIDU are now forming very similar patterns to that which they formed back in late 2007 and which lead to the nasty bear market of 2008 and early 2009.

Now I am not anticipating a brutal bear market like we had back then. No one ever knows how nasty a decline is going to be. What I do know is that the prudent thing to do is to get long at the start of a new uptrend and go to cash or short a new correction.

Right now the indications I am seeing are saying that the balance of probabilities point to a correction on the horizon. So although I am short term bullish. Longer term I am very bearish on the market. So I believe it is a bit too early to get short right now. But what I plan to do is to wait and see if we get a feeble low volume three to five day bounce that fails and then get short of stocks with the best set ups from the stocks on my short watchlist or even stocks from my long list that experience base failure like AAPL for instance.

Until then good luck and good trading!

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