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.

Nightmare on Wall Street 2: Credit's Revenge

Scary stuff was going down today, I hope everyone was being safe. Rather than talk about it, I've just got a few charts for you that are simply breathtaking. For commentary, I think Tim brings up some excellent points today.

Lets start with the Dow Jones etf over the last two days (5 min time scale):

Then CROX over the last five days on a 15 minute time scale:

My goodness, MBI over the last two months:

Then theres DSL, a "savings and loan" corporation over the last two months :

And the current king of carnage is bond insurer ABK on a six month daily time scale:
With people focused so much on tech stocks these days its easy to not notice the recession/bear market already occurring in some sectors of our economy.

Disclosure: I own DIA puts
A Nightmare On Elm Street 2 - Freddy's Revenge..... Trailer

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DSL Long Term Chart

A few months ago DSL broke down out of a two year symmetric triangle. It dropped 42% on increasing volume to find a low at 43.55 on record volume. Since then, a mild euphoria has swept over share holders of the savings and loan company as it climbed 45% to touch the bottom side of the triangle at 63.17. If this 45% rule continues and the stock completes something of an ABC correction, then it could see 36.64.

Of course that might be alot to expect out of any ordinary stock, but then again...

Acording to yahoo, DSL "originates and invests in loans, such as residential real estate mortgage loans, investment securities, and mortgage-backed securities; and originates and sells loans to investors in the secondary markets." Oh, you know, that sector of our economy which has completely fallen apart this year as the housing market tumbled. And while wall street likes to huddle around and sing kumbuya to their god, Ben Bernanke, the fed's desperate rate cut to save the markets isn't going to reverse the popping housing bubble. Just wait until earnings start coming out for these mortgage companies. Did no one listen to what Citibank said earlier this week? Good grief!

Dunno, it looks like a golden short to me so I bought some 60 puts.