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Tickers in this Article: RGR, REDF, SIFY, AMEX:REE
While the markets are oversold and likely due some sort of bounce, it appears that many stocks are simply setting up for a shorting opportunity. There was significant technical damage that occurred to many stocks throughout the recent market weakness, and it's possible that the markets still have room on the downside. If the market is indeed headed lower, then traders should focus on stocks that are damaged, rather than focusing their attention to stocks that are possibly overvalued, but showing strength. Much like focusing on healthy patterns during an uptrend, traders should focus on the weak stocks during a downtrend.

TUTORIAL: Stock Basics

Sturm, Ruger & Company, Inc. Co
(NYSE:RGR) is a stock that has been exceptionally strong over the past few months, but has really started to come under pressure recently. RGR had surged in March as it rallied almost 10 points. It then started experiencing some volatility and in the process formed a double top. While technically speaking the neckline for the pattern based on closing prices is near $20, there is some formidable support near $19. Traders should keep an eye on how RGR behaves between $19 and $20, but if it breaks under this level it could drop all the way towards the initial breakout near $15.

Sturm, Ruger & Company, Inc. Co stock chart
Rediff.com India Limited (Nasdaq:REDF) is another stock that has had some incredible momentum this year. It was trading under $5 for most of the past two years until exploding all the way to $18 this spring. While some retracement was expected, REDF has dropped over 50% is just a few weeks. While it is likely too extended to short at this point, it is also stuck under a prior support level near $10. Traders should watch this level closely, in case REDF tests it on any market strength. (For more, see Technical Analysis: Introduction.)

Rediff.com India Limited stock chart
Sify Technologies Limited (Nasdaq: SIFY) is another Indian stock that was rallying strongly earlier this year. It tripled in price in just a few months, but much like REDF also was chopped in half recently. SIFY is clinging to support near the $4 level, but could come under even more pressure on a drop below this area.

Sify Technologies Limited stock chart

Rare Element Resources Ltd.
(AMEX:REE) is another stock that has been incredibly volatile. While today's strength may lead to a short squeeze, REE is also trading under the majority of the past few month's worth of price action. Until REE can climb back above the $11-$13 level, it is likely to be sold into on any strength.


Bottom Line
Many of the tickers mentioned in this article are extremely volatile, so traders need to exercise caution. Beyond that, heavily shorted stocks are prone to short squeezes that serve to magnify their volatility. That being said, each of these stocks are also looking like their momentum has run out. If the markets do experience a short-lived bounce, then these stocks may provide a decent shorting opportunity.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

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