Sunday, December 02, 2007

Secondary Proper Short Sale Point on LEH

O'neil's proper short sale point is something I have discussed in the past and tonight just wanted to point out a few charts in the context of this "proper" entry and talk about the next best entry if you miss the initial drop. This is discussed in detail in O'neil's book How to Make Money Selling Stocks Short, which I highly recommend. To start with I'll remind you of O'neil's approach with a figure from his book:

Shorting early can be deadly because stocks can rally much longer than you can stay solvent. Furthermore, it is certainly inappropriate to get short before a major decline is confirmed. According to O'neil the proper time to get short is after the stock has vacillated about it's 50 day moving average (or 10 week) then breaks lower on huge volume. You can see that this strategy would have been extremely profitable on SHLD:

But what about if you miss that first major decline? I think the next best entry on shorts comes a couple months later after the stock has bounced back to where it initially broke down which tends to be near it's 200 day moving average (40 week). As you can see from the DSL chart below, a good secondary entry would be when the stock failed at former support near 60$ which was just shy of its 200 dma.

So are there any stocks out there currently at this secondary short sale point? I think LEH is a prime example. Shorting here seems like easy money but wait for the break on heavy volume. LEH has already bounced back up to its initial breakdown price near 67.50 which is where the 200 dma is and where I would place my stop.

I have included the volume by price in these charts since it tends to correlate well with the proper short sale points. When a stock begins to drop away from one of the heavy volume regions, for example $60 for LEH, that is when you really want to be short.

Disclosure: I have puts on a bunch of stuff but not on any of these three stocks at this time.

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