The current market remains a very dangerous environment for market bulls. Despite several furious rally attempts over the past month, the general indexes remain in a vulnerable position. Beyond this, the vast majority of stocks remain technically damaged and approximately 70% of them are still below their 40-day moving averages. With the market clearly acting weakly, it may make more sense to short into rallies as it appears there are still plenty of sellers even at these lower prices. Several stocks took advantage of this weeks bounce and are approaching areas that may act as significant resistance.
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For instance, Rediff.com India Limited (Nasdaq:REDF) recently started to fall out of a base it has been attempting to build for several months. REDF attempted to rally off the $8 level a few times over the past few weeks, but has seen constant selling pressure. While it has not had a full-fledged breakdown, the stock has had ample opportunity to move back higher with very little success. After falling out of the base, REDF did bounce back along with the markets this week and is approaching the $8 level from underneath. This is a key test for the stock, and a failure here could lead to much lower prices. (For more, see Short Sales For Market Downturns.)
Cardiovascular Systems, Inc. (Nasdaq:CSII) is another stock that is approaching a key resistance level from underneath after this weeks bounce. CSII had started to falter in late August and has been steadily setting lower lows and highs over the past several weeks. CSII bounced off its 200-day moving average on several occasions over the past month until finally dropping under the level a few days ago. It is now testing this level from underneath, and could encounter selling here. (For more, see Moving Averages: Introduction.)
Seabridge Gold, Inc. (AMEX:SA) is a gold stock that had been acting poorly even before the recent market volatility. SA had been attempting to form a base from June through September before falling apart in late September. SA had been failing on each test of its 200-day moving average and that was a clear sign that things were not well. SA dropped under the base and is trying to bounce back to fill the downside gap it left behind near $26. Sellers may step in around this level, so traders should watch for a possible reversal.
Sohu.com Inc. (Nasdaq:SOHU) is another stock trying to rebound after falling out of its base. In the case of SOHU, it still has some room before running into resistance above. However, the breakdown appears to have begun a new trend lower, so traders should definitely keep an eye on it. SOHU had been trying to find support near $70 for a few months and appeared to be close to a breakout in late August. However, by mid September, the wheels came off and SOHU dropped to new lows. Traders should keep an eye on this bounce attempt as there are likely many trapped longs looking to get out.
The Bottom Line
Most people not involved in the markets have no idea that traders can benefit from stocks moving lower. And in reality, most traders should probably avoid shorting, as it is more difficult for various reasons. For one, the market is usually more volatile during periods where traders should be shorting, and second, everything moves quicker. Short squeezes can shake out even experienced traders, making timing even more important. However, looking at weak stocks bouncing into prior support levels is a viable shorting strategy in a weak market. All of these stocks have proven some form of weakness over the past few weeks and could be headed even lower. By monitoring how they behave near these new resistance levels, traders may be presented with an excellent shorting opportunity. (For more, see Technical Analysis Introduction.)
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At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.