The overall uptrend in the S&P 500 continues despite light trading volume and regular pullbacks from marginally higher highs. While this isn't a reason to bet against the trend, it's always worthwhile to have a few stocks written down to trade on the short side in case the market does break lower.

Relative strength, or weakness, is a key component when deciding which stocks to trade. These stocks are already showing relative weakness compared to the S&P 500, which means if the S&P 500 falters these stocks are likely to get hit hard by sellers. No strategy is flawless, but by shorting already weak stocks if the market turns weak, there is some leeway because even if the market doesn't fall much these stocks are already in downtrends that could still continue.

J.P. Morgan Chase & Co. (JPM) has been in a corrective phase since it topped out at $61.48 in March. Since then the price has broken below several prior lows, and while the recent pullback saw some aggressive buying, ultimately the volume was light on the rally and the price is once again moving lower. Recall that the S&P 500 made a higher high in July, so this strong selling in J.P. Morgan shows the stock is considerably weaker than the broader market at this time. On July 8 the stock was down 1.61% compared to the S&P 500 SPDR (SPY) which was down 0.64%. If the stock is this weak currently, it could be hit even harder when the S&P 500 witnesses more sustained declines.

JPM moved lower

Regions Financial Corp. (RF) also peaked in March at $11.54. The stock rallied in June but ultimately hit stiff resistance just below $11. A potential head and shoulders pattern is also in the making. A short-term drop below $10.40 could trigger a down wave which tests support—and the head and shoulders breakout point—at $9.79. If price breaks below the head and shoulders pattern support level the stock's target is just above $8. From a long-term and short-term perspective the price action shows relative weakness compared to the S&P 500. The stock sold off 1.86% on July 8, relative to the 0.64% S&P 500 SPDR decline.

RF head and shoulder pattern

ING Group (ING), another financial sector stock, also sold off more than the S&P 500 on July 8. This stock hasn't been able to make headway higher since mid-January. It is moving between resistance near $14.80 and support near $12.90. After testing resistance in June and early July, and failing to break above it, the most likely course for the price to take is back toward support. A long-term break of support could take the price to $11.

ING moved between resistance and support

Pentair PLC (PNR) peaked in March at $83.37, and has been sliding since. In late June and July the decline has seen rising volume, as the price broke below the neckline ($72.40) of a complex head and shoulders pattern. The overall lower highs since March show buyers are unwilling to step up and accumulate the stock, and sellers are eager to get out. The head and shoulders pattern provides a target of roughly $62. July 8 also saw the stock decline more than S&P 500, showing that the relative weakness is still in force.

PNR broke neckline

The Bottom Line

Trading against a major uptrend like what the S&P 500 is in isn't always wise, yet having a few stocks to trade on S&P 500 down days/weeks is just good planning. These stocks are already in downtrends, so trading the short side is the more favorable play than trying to buy via bottom picking. Also, the down days in these stocks are typically greater (in terms of percentage moves) than corresponding S&P 500 down days, which means greater profit potential if on the right side of the trade. The goal is not to exclude long trades and participate in the broader market uptrend, but to simply provide some trading alternatives and swing trading diversification when the S&P 500 is weak.

Related Articles
  1. Chart Advisor

    Trading Market Leading Technology Stocks

    The technology sector has taken off. These four stocks have led the charge, racking up more than 10% gains in the last month alone.
  2. Active Trading Fundamentals

    Day Trading Rules For Rookies: Don't Play It By Ear!

    If you want to start day trading as a rookie, follow these guidelines.
  3. Active Trading Fundamentals

    A Guide To Day Trading On Margin

    Buying on margin is a good option if you don't have the cash to day trade.
  4. Chart Advisor

    Four Trading Setups To Avoid A Pullback

    Technical lessons from four DJIA stocks that performed poorly in 2013.
  5. Active Trading Fundamentals

    An Introduction To Day Trading

    This article will take an objective look at day trading, who does it and how it is done.
  6. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  7. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  8. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  9. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  10. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Securities-Based Lending

    The practice of making loans using securities as collateral. ...
  3. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  4. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  5. Tactical Trading

    A style of investing for the relatively short term based on anticipated ...
  6. Gross Exposure

    The absolute level of a fund's investments.
RELATED FAQS
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!