Since bouncing off their April 11 lows, both the NASDAQ and S&P 500 have scored six straight days of gains.
To the casual observer lacking any knowledge of technical analysis, it may appear as though the market pullback of the past month is over and stocks are once again working their way back to new highs.
Because any scenario is indeed possible when it comes to the stock market, such an idea is not impossible to believe.
However, the rally of the past week was more about stocks bouncing from deeply “oversold” levels than fresh bullish setups breaking out from quality basing patterns.
This certainly does not inspire much confidence in the current move off the lows and leads me to believe there are…
3 Reasons Why The Stock Market Correction Is Not Yet Finished:
- So far, the countertrend bounce off the lows has mostly been on declining volume. This points to a lack of demand among institutions (banks, mutual funds, hedge funds, etc.), many of which may be standing by to unload more shares into strength in the coming days/weeks.
- The stock market is currently being held up energy, utility, and real estate sectors, while growth-type stocks (leaders in most healthy bull markets) are in repair mode. When leading stocks and sectors in the market are in the “defensive” sector, I surely know it is not the type of momentum-driven bull market I am thrilled to buy.
- Despite its gains of the past week, the NASDAQ is approaching a plethora of technical overhead resistance levels, such as its prior “swing high,” 50-day moving average, and downtrend line from the early March high. Although the S&P 500 Index is in better shape because it remains closer to its all-time highs, relative weakness in the NASDAQ (which will likely take some time to work itself out) should continue to hold any rally attempts by the rest of the broad market in check.
Based on the three objective facts above, I view the current bounce in the stock market as an opportunity to sell short (and/or buy “short ETFs”) at low-risk entry points, rather than risking hard-earned profits of the past few quarters on the long side of the market right now (with the exception of select commodity ETFs with minimal to zero correlation to stocks).
2 Stocks & 1 Inverse ETF To Put On Your Short Selling Watchlist
As mentioned above, there are still a handful of non “A-rated” stocks in defensive sectors that may push higher in the near-term, but clearly this is not the type of high momentum, growth-driven market I like to swing trade on the long side.
Presently, there are a handful of stocks that meet my criteria for selling short (former leading stocks blowing up), but I have not yet spotted low-risk swing trade entry points on the daily charts.
My favorite type of short setup is when a recent leadership stock breaks down on the weekly chart, then begins to set “lower highs” and “lower lows” beneath its 10-week moving average (similar to the 50-day moving average).
Lululemon Athletica ($LULU)
A good example of this type of short selling setup can be found in $LULU, which convincingly formed a major top in 2012 and 2013, after previously ripping 3,000% off the lows of 2009. This is shown on the weekly chart below:
With $LULU below key horizontal price support of the $60 level, its 40-week moving average, and recently below the 10-week moving average as well, the stock could suffer a pretty ugly sell-off over the next several months if broad market conditions continue to deteriorate.
Zooming into the shorter-term daily chart of $LULU (below), notice the stock has recently touched the lower channel support of a short to intermediate-term rising channel:
Since $LULU has just come into support of its lower trend channel (circled in blue), the current price of $LULU does not offer much of a low-risk entry point.
Instead, I would ideally love to see $LULU bounce to the $53-$54 area, then stall out again.
Such price action would form the first “lower high” on the daily chart interval. But until that happens, I am simply monitoring this stock on my internal short selling watchlist.
Another example of a former leadership stock that has blown up is $CONN, which rallied more than 2,000% off its 2011 lows before crashing through its 40-week moving average (similar to 200-day moving average) earlier this year:
Since plunging through its 40-week/200-day moving average on huge volume (a sign of institutional distribution), it has been grinding higher over the past six weeks, and has recently closed back above its 10-week/50-day moving average.
Next, let’s drill down to the price action on the daily chart:
Although $CONN is still in bounce mode, I do not think the stock will fill the gap created in February of this year.
As such, a bounce to the $50 area would be a gift of an entry on the short side (if it can get there).
As with $LULU, I remain on the sidelines with this setup, but will be monitoring closely for a potential short entry in my nightly swing trading newsletter.
Selling Short Financials With A “Short ETF” ($KBE, $FAZ)
Two weeks ago, the S&P Bank SPDR ETF ($KBE) sliced through key, intermediate-term support of its 50-day moving average on heavy volume, and has since been wedging higher on lighter than average volume:
Labeled as “ideal short zone” on the chart above, notice how the 20-day exponential moving average and 50-day moving average have converged to form major overhead resistance.
A bounce to (or near) that level of moving average convergence, followed by a bearish reversal candlestick or gap down, would provide me with a low-risk short selling entry point.
If an ideal short entry develops, I would look to sell short $KBE by buying leveraged Financial Bear 3x ETF ($FAZ), which has plenty of liquidity with an average of more than 7 million shared traded per day:
Although the price and volume action has not been that impressive during the bounce off the lows, the market could continue to push higher for a few more days before reversing.
Because of this, I feel it still may be a bit too early to get busy on the short side with $KBE/$FAZ.
As a side note, leveraged ETFs such as $FAZ should not be held as long-term “investments” because they frequently underperform the underlying index with longer holding periods.
But for momentum swing trading, I find ETFs such as $FAZ to be suitable trading vehicles. Further, “short ETFs” are a great way for traders & investors with non-marginable accounts (such as IRAs) to gain short exposure to the market.
Timing Is Everything – Especially On The Short Side!
Over the past 15 years, I have learned the market is much less forgiving of sloppy timing on the short side compared to long entries in a bull market. As such, patience to enter any of the three short setups above (and many others) is crucial right now (this short video explains why).
Further, it’s important to understand that new long entries are not yet completely off the table. If, for example, the stock market pulls back after this rally, comes into support and holds, new long setups may emerge.
For now, it’s even fair to say stocks are merely entering into a protracted trading range.
Nevertheless, in the coming days and weeks, I will be providing subscribers of The Wagner Daily with my preset and exact entry, stop, and target prices for these and any other stocks/ETFs that meet my criteria for swing trade entry.
Subscribe today to ensure you don’t miss out on the next big move in the markets.
3 comments on “2 Former Leading Stocks To Sell Short Into The Bounce (And 1 Short ETF)”
I normally don’t read too many blogs or posts these days but I happen to click on this article and found myself thinking “this guy gets it.” The timing in short sales is crucial because as you know while price will have many one day collapses usually after real news events (8k, Earnings, Inside sales), the stock will get bulled by sell side etc. from quarter to quarter.
Thanks for your kind words. Glad you enjoyed the article.
Wishing you the best of success in your stock trading,
I’m definitely in agreement. The low RS of the NASDAQ is an ominous sign. Many of the once-leading growth stocks have been getting crushed lately.
I’ve already been shorting stocks that have bounced into resistance and I continue to look for set-ups on the short side.
I especially like the LULU daily chart set-up and the idea of going short when the next rally appears to climax.
I’ll be following your articles.